The Institute for Supply Management said its index of national factory activity rose to 42.8 in May from 40.1 in April. This was the index's highest reading since September and was the fifth straight monthly rise.
Separately, the Commerce Department said consumer spending slipped 0.1% in April after a 0.3% fall in March and spending on construction projects rose 0.8% in April from March, the biggest increase since August.
"Severe recessionary conditions appear to have subsided in the second quarter," said Michael Woolfolk, senior currency strategist at the Bank of New York-Mellon.
U.S. stock indexes extended gains after the economic data, while U.S. Treasury debt prices extended losses. The U.S. dollar extended losses versus the euro.
A reading below 50 in the manufacturing index indicates contraction. ISM said the index has been below this threshold for 16 straight months.
However, the fifth straight monthly rise in this measure of U.S. manufacturing followed encouraging signs from China and Europe that the world has moved past the worst the current downturn.
"It was better than expected, and I would put particular emphasis on the new orders component, which broke above 50," said Michael Darda, chief economist at MKM Partners LLC, Greenwich, Connecticut. "In my view, this is more evidence that we're getting closer to the end of the recession.
But this hopeful economic outlook was mitigated by the widely expected bankruptcy of General Motors (GM, Fortune 500), the biggest ever in U.S. manufacturing.
The Commerce Department report showed personal income rose 0.5%, the biggest increase since May last year, after falling by a revised 0.2% in March. Analysts polled by Reuters had forecast income to fall 0.2% in April.
Disposable income surged 1.1% in April, boosted by tax cuts and increased social benefit payments under the government's record $787 billion stimulus package, the Commerce Department said. Excluding the stimulus package, disposable income increased 0.7% in April.
Savings jumped to a record annual rate of $620.2 billion. The savings rate rose to 5.7% in April, the highest level since February 1995, from 4.5% the previous month.
Households, buffeted by job losses and falling asset values, are cutting spending on nonessential items, preferring to save any extra income.
In another report, the Commerce Department said private construction spending jumped 1.4% in April from March, the biggest advance since August. Private residential construction rose 0.7%, also the biggest increase since August, after declining 3.6% in March.
Spending on public construction fell 0.6% in April after increasing 1% in March. Federal spending on construction projects plummeted 6.5% in April, the biggest drop since January.
