Manufacturing index hits highest level since June 2011

The sector contracted in May with continued uncertainty around fiscal policy and global financial stability. 

The August figure got a boost from a healthy increase in new orders, which rose to 63.2 from 58.3, another more than two-year high. 

Still, employment showed signs of slowing, dropping to 53.3 from 54.4.

Exports were up to 55.5 from 53.5. The improvement in trade helped boost economic growth in the second quarter to 2.5 percent, which was better than the 1.7 initially reported, the Commerce Department reported last week. 

While the ISM report showed that 15 out of 18 industries reported that their businesses expanded, several expressed concern that the cuts in government spending were slowing growth while others said domestic and international sales had improved. 

The manufacturing report will be considered as part of a broader batch of data the Federal Reserve will use to determine whether or not to begin tapering its $85 billion in monthly stimulus.

The August jobs report, due out on Friday, is another key for the Fed in determining its next steps keep the recovery moving forward and interest rates low for what could be until 2015. 

In response, mortgage rates have ticked up about 1 percentage point in the past few months in anticipation of the Fed's move. But Chairman Ben Bernanke said that while the central bank may gradually start winding down its stimulus this month, policymakers would not let interest rates rise until the jobless rate was, at least, down to 6.5 percent.