Published: Monday, 2 Nov 2009 | 11:24 AM ET

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U.S. economic expansion could accelerate in the fourth quarter after data released on Monday showed stronger-than-expected growth in manufacturing in October, according to a business group.

U.S. manufacturing activity rose to its highest level in 3-1/2 years last month and pending home sales contracts unexpectedly surged in September, offering hope the budding economic recovery would be sustained.

The Institute for Supply Management said its index of national factory activity rose to 55.7 in October, the highest level since April 2006, from 52.6 in September. Analysts had expected a reading of just 53.0.

It was the third straight month the gauge came in above 50, the dividing line between expansion and contraction.

A separate report from the National Association of Realtors showed the real estate group's Pending Home Sales Index, based on contracts signed in September, rose 6.1 percent to 110.1 — the highest level since December 2006.

It was the eighth straight monthly rise in the index, the longest streak since the measurement started in 2001. Markets had expected pending home sales, which lead existing home sales by one to two months, to be flat in September after rising to 103.8 in August.

U.S stock indexes surged on the data, which calmed fears that the economic recovery that started in the third quarter might falter as unemployment mounts. U.S. Treasury debt prices added to losses.

"All the numbers show stabilization and the start of some expansion. That's a continuation of what we've been seeing for the past couple of months," said Thomas Nyheim, vice president and portfolio manager at Christiana Bank & Trust in Greenville, Delaware.

U.S. Federal Reserve officials meet Tuesday and Wednesday and are expected to signal a willingness to keep their stimulative policies in place for some time yet to make sure a self-sustaining recovery takes root.

The U.S. economy grew in the third quarter for the first time in more than a year, probably ending a recession that began in December 2007.

Pending home sales were fueled by first-time buyers rushing to conclude deals before this month's expiry of the popular $8,000 tax credit for first-time buyers.

"What we're witnessing is a rush of first-time buyers trying to beat the expiration of the tax credit at the end of this month," said NAR chief economist Lawrence Yun.

The Pending Homes Sales Index surged a record 21.2 percent in September from the same period a year-ago.

A report from the Commerce Department showed spending on construction projects rose 0.8 percent to $940.3 billion, after dropping 0.1 percent in August. Spending originally was reported as rising 0.8 percent in August.

Analysts polled by Reuters had expected spending to fall 0.2 percent. Public construction, fueled by billions of dollars of capital works spending in the U.S. economic stimulus plan, rose 1.3 percent to $326.4 billion, an all-time high, after falling 1.1 percent in August.

State and local construction, which was up 1.4 percent after being down 0.5 percent in August, also reached an all-time high. Home building rose 3.9 percent, its largest gain since rising 4.2 percent in July 2003, in a sign that strength may be returning to the devastated housing market.

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