U.S. private payrolls rise solidly; factory activity picks up

WASHINGTON (Reuters) - U.S. private employers hired the most workers in six months in June and factory activity accelerated, providing fresh evidence the economy was gathering solid momentum after contracting at the start of the year.

The brightening growth outlook was also bolstered by other data on Wednesday showing auto sales remained strong in June and construction spending rose in May to its highest level in just over 6-1/2-years.

The recent raft of upbeat data supports views of a September interest rate hike from the Federal Reserve, although market-based forecasting tools suggest lift-off may not occur until late in the year or even in 2016.

The ADP National Employment Report showed 237,000 private-sector jobs were created in June, handily exceeding the median expectation among economists surveyed by Reuters for a gain of 218,000 jobs.

That followed May's job gains of 203,000, and June's gain marked the third straight month of improvement since the pace of hiring had slumped to a 14-month low back in March as the economy stalled in the first quarter.

"The U.S. job machine remains in high gear," Mark Zandi, chief economist for Moody's Analytics, said in a statement. "The

current robust pace of job growth is double that needed to absorb the growth in the working age population."

The report, which is jointly developed with Moody's Analytics, came ahead of the government's more comprehensive employment report on Thursday.

According to a Reuters survey of economists, nonfarm payrolls likely increased 230,000 jobs in June after a robust 280,000 gain in May. The unemployment rate was forecast dipping one-tenth of a percentage point back to a seven-year low of 5.4 percent.

In a separate report, the Institute for Supply Management (ISM) said its national factory activity index rose to 53.5 in June, a five-month high, from a reading of 52.8 in May.

A reading above 50 indicates expansion in the manufacturing sector. Last month's increase in the ISM is a welcome development for manufacturing, which is struggling with the lingering effects of dollar strength and lower energy prices.

A gauge of new orders received by factories rose to 56.0 last month from 55.8 in May.

In a third report, the Commerce Department said construction spending increased 0.8 percent to an annual rate of $1.04 trillion, the highest level since October 2008.

The reports added to robust data on employment, consumer spending, consumer confidence and housing, in suggesting that growth was gaining steam after gross domestic product shrank at a 0.2 percent annual rate in the first quarter.

The economy was hit by bad weather, port disruptions, a strong dollar and spending cuts in the energy sector at the start of the year. U.S. stocks extended gains on the data, while prices for U.S. Treasury debt fell. The dollar rose against a basket of currencies.

The improvement in the ADP report last month was led by small businesses and the services sector. Employers with fewer than 50 workers added 120,000 jobs last month, while services providers hired 225,000 people, the most since November.

Other sectors showing strength included professional and business services, which added 61,000, also the most since December, and trade, transportation and utilities, which added 50,000 to keep pace with May's gains.

Earlier on Wednesday, the Mortgage Bankers Association reported a drop in applications for home purchase loans and refinancings of existing mortgages in the latest week. That coincided with an increase in the average rate on a 30-year fixed-rate mortgage to 4.26 percent, the highest level since last October.

U.S. auto sales, often an early snapshot into consumer spending each month, are expected to rise about 5 percent for the industry in June. Truck and SUV sales will again grow at a faster pace than sedans, aided by the low gasoline prices.

(Writing by Lucia Mutikani and Dan Burns; Reporting by Richard Leong; Editing by Chizu Nomiyama and Andrea Ricci)