Aug. 3 (Bloomberg) -- Manufacturing in the U.S. shrank less than forecast as stimulus-induced gains in demand worldwide helped resuscitate factories from the worst slump in three decades.

The Institute for Supply Management’s factory gauge rose to an 11-month high of 48.9 in July, according to the Tempe, Arizona, group. Readings below 50 signal contraction. A report from the Commerce Department showed June building projects climbed 0.3 percent, helped by higher public spending.

Factory gauges around the world showed advances for July, indicating government programs from Washington to Beijing aimed at reviving demand are starting to take hold. Stocks climbed, while Treasury securities and the dollar sank, as investor demand for riskier assets increased.

“The recession is coming to an end,” said Conrad DeQuadros, senior economist at RDQ Economics in New York. “It does look like the second half of the year is turning out to be better than we thought.”

The Standard & Poor’s 500 Stock Index gained 1.5 percent to close at 1,002.63 today in New York, the first time the index has passed 1,000 since November. Yields on benchmark 10-year notes jumped to 3.63 percent from 3.48 percent at last week’s close, and the dollar dropped to the lowest against the currencies of six major trading partners since the weeks after Lehman Brothers Holdings Inc. went bankrupt.

Global Improvement

Another purchasing managers’ index showed manufacturing in China expanded, rising to the highest level in a year. Reports today also showed manufacturing expanded in the U.K. for the first time in more than a year, shrank less in Europe than initially estimated and declined at a slower pace in Australia.

Economists forecast the ISM gauge would rise to 46.5 from 44.8 in June, according to the median of 77 forecasts in a Bloomberg News survey. Estimates ranged from 44.1 to 49.

The readings for new orders and production jumped to the highest level in more than two years, today’s report showed. A measure of exports showed the first expansion in overseas demand since September.

“The wheels of the economic train have stopped moving in reverse and are starting to grind forward,” said Brian Bethune, chief financial economist at IHS Global Insight in Lexington, Massachusetts. “We’re starting to see a pickup in production, partly due to the turn in residential construction” and also in the automobile industry, he said.

Auto Sales

The factory slump is abating following record reductions in inventories, smaller cutbacks in business investment and an end to the slump in homebuilding. The federal “cash-for-clunkers” program is also boosting demand for cars.

Ford Motor Co. said today sales rose 2.3 percent in July, its first monthly gain since 2007. Total purchases for the industry jumped to an 11.3 million annual pace last month, the highest level since September.

The government’s program, which offers as much as $4,500 for trading in older, less fuel-efficient vehicles, ran through the $1 billion available in about a week, and Congress is considering $2 billion more.

Companies such as Motorola Inc., Caterpillar Inc. and Dow Chemical Co. reported better-than-estimated earnings over the last couple of weeks.

Rockwell Collins Inc., an aircraft-parts producer based in Cedar Rapids, Iowa, last week maintained its forecast for the year and said a drop in business-jet sales appears to be nearing a bottom.

Less ‘Bad News’

“We’re starting to see some stabilization and a relative decrease in the flow of bad news,” Chief Executive Officer Clay Jones said on a conference call July 30.

Dow Chemical, the largest U.S. chemical maker, last week posted second-quarter profit that topped analysts’ estimates as demand improved from earlier in the year.

“The United States economy has found bottom, but will be slow in recovering as unemployment continues to be a drag on consumer spending,” Chief Executive Officer Andrew Liveris said in a July 30 statement.

The economy shrank at a 1 percent annual pace in the second quarter, less than forecast, figures from the Commerce Department July 31 showed, helped by a jump in government spending that masked a deeper retrenchment by consumers.

Consumer spending, which accounts for about 70 percent of the economy, fell at a 1.2 percent pace following a 0.6 percent increase in the prior quarter. Purchases slid 2 percent since the peak at their end of 2007 -- the most since the 1980 recession.

Homebuilding, Stimulus

The Commerce construction report showed private residential projects rose for the second time in three months and spending by the federal government increased by the most this year.

Spending on infrastructure projects is likely to keep rising in coming months as state and local governments use funds from the $787 billion fiscal stimulus package. In addition, lower home prices and mortgage rates are beginning to boost sales, spurring residential construction and bringing an end to the worst housing slump in seven decades.

“The huge drag from residential construction will probably go away in the third quarter and that’ll provide a general lift to the economy,” said IHS Global Insight’s Bethune. “There’s no question that the fiscal stimulus is helping on the non- residential side.”

To contact the reporter on this story: Courtney Schlisserman in Washington at cschlisserma@bloomberg.net.

Last Updated: August 3, 2009 17:04 EDT