U.S. manufacturing activity increased to its highest level in nearly 3-1/2 years in August and construction spending rebounded strongly in July, in further signs of vigor in the economy.

The Institute for Supply Management (ISM) said on Tuesday its index of national factory activity rose to 59.0 last month, the highest reading since March 2011, from 57.1 in July.

A reading above 50 indicates expansion in the manufacturing sector. Economists had expected a pullback to 56.8. August's reading was boosted by a surge in the new orders gauge, which touched its highest level since April 2004.

Separately, the Commerce Department said construction spending increased 1.8 percent to an annual rate of $981.31 billion, the highest level since December 2008.

The reports added to employment data in painting an upbeat picture of the economy in the third quarter.

The dollar hit a session high against the yen and held gains versus the euro on the data. U.S. Treasury debt prices extended losses, while U.S. stocks were little changed.

July's percentage rise in construction spending was the largest since May 2012 and reflected gains across all categories, with the exception of federal government.

It followed June's revised 0.9 percent decline.

Economists had forecast construction spending increasing 1.0 percent after a previously reported 1.8 percent drop in June.

Construction spending in July was buoyed by a 3.4 percent jump in state and local government projects, which lifted outlays to their highest level since June 2012. The increase in state and local government outlays, which was the largest since April 2013, offset a 1.1 percent drop in spending by the federal government on construction projects.

Private construction, the largest portion of construction spending, advanced 1.4 percent to its highest level since November 2008. Private residential construction spending gained 0.7 percent as housing starts rebounded.

The housing market recovery is back on track after stagnating from the second half of 2013 in the wake of a spike in mortgage rates and higher home prices amid a stock shortage.

Part of the increase in private residential construction spending reflected home improvements.

Investment in private nonresidential structures such as factories and gas pipelines jumped 2.1 percent in July to its highest level in five years.

(Reporting By Lucia Mutikani; Additional reporting by Sam Forgione in New York; Editing by Andrea Ricci)