A second dataset has also shown that consumer spending ended 2010 on a firmer footing, a trend expected to continue as the labour market recovery gains traction.
The Institute for Supply Management-Chicago business barometer rose to 68.8 in January – the highest level since July 1988 – from 66.8 in December.
“The manufacturing sector appears to have weathered the slowdown in the middle of last year and growth is now accelerating back towards the pace seen last spring,” said Paul Ashworth, an economist at Capital Economics.
Economists had expected the index, which gives a first look at the manufacturing sector, to slip to 65.0. A reading above 50 indicates economic expansion.
The index was lifted by jump in measures for new orders and employment throughout January.
"The factory sector news is an important positive omen for the broader economy, because increased production will yield significant income generation, which in turn will fuel stronger household consumption," said Joseph LaVorgna, chief US economist at Deutsche Bank Securities in New York.
In a separate report, the Commerce Department said spending rose 0.7 per cent in December for the sixth straight month, after rising by 0.3 per cent in November.
Wall Street responded positively to the news, with all major indices gaining as investor sentiment improved.
“Investors were heartened by solid US consumer spending figures confirming the sixth straight month gains as households delved into their pockets over the Christmas period,” said Giles Watts, head of equities at City Index.
Economists had expected spending, which accounts for about 70 per cent of US economic activity, to increase 0.5 per cent last month.
Spending in December came as incomes increased 0.4 per cent, in line with economists' expectations, and savings dropped to their lowest level since March.
Savings fell to $614.1bn (£387bn) from $634.4 billion in November.