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The U.S. manufacturing sector grew faster than expected in August but private employers unexpectedly cut jobs, showing the economic recovery still faces headwinds.

The 13th straight month of manufacturing expansion calmed fears that U.S. economy may head back into recession, but the drop in employment and a slump in construction spending to a 10-year low in July kept concerns about slow economic growth alive.

"Our expectation is that we don’t have an economic double-dip, though we recognize that the risks of something like that are a lot higher now that we’re closer to zero on the growth rate," said Jason Pride, director of investment strategy at Glenmede Investment and Wealth Management in Philadelphia.

"We’re in the middle of what is typically a growth scare, where the economic cycle slows down after an initial run up as stimulus fades and we transition from stimulus to having the economy standing on its own," he said.

The Institute for Supply Management said its index of national factory activity rose to 56.3 from 55.5 in July. Economists had forecast a fall in the index to 53.0. A reading above 50 indicates expansion in the sector.

In a separate report, the private sector unexpectedly cut 10,000 jobs in August compared to a gain of 37,000 in July, ADP Employer Services said.

U.S. stock indexes rallied on the manufacturing report, while prices for safe-haven government debt fell. The U.S. dollar fell against the euro but rose versus the yen.