U.S. companies hired more workers than expected in July as the labor market slowly chugged along, but the country's manufacturing sector remained weak last month, data showed on Wednesday.

The ADP National Employment Report showed private employers created 163,000 jobs in July, more than the 120,000 that had been expected though slightly less than June's 172,000. June was
originally reported as 176,000.

"The U.S. continues to have consistently positive private sector payroll growth, albeit at a painfully slow rate,'' said Eric Stein, VP and portfolio manager at Eaton Vance Management in Boston.
The ADP figures come ahead of the government's much more comprehensive labor market report on Friday, which includes both public and private sector employment.

That report is expected to show nonfarm payrolls rose by a modest 100,000 last month, while the unemployment rate is seen staying the same at 8.2 percent.

Economists estimate the labor market needs to create about 125,000 jobs a month to keep the unemployment rate steady, though estimates vary. Analysts often refer to the ADP report to fine-tune their
expectations for the payrolls numbers, though it is not always accurate in predicting the outcome. The ADP report has differed from the government's private jobs number by an average of about 50,000 so far this year, said Cooper Howes, economist at Barclays.

If that continues, it would be in line with a forecast for a gain of 100,000 nonfarm payrolls last month, said Howes. The day's data came as Federal Reserve policymakers head into the second day of a two-day meeting with investors watching to see if the central bank will unveil fresh measures to bolster the economy.

The pace of economic growth has slowed in recent months as the recovery has been buffeted by the euro zone debt crisis, a struggling U.S. labor market and concerns over higher taxes and
government spending cuts that are set to take place next year. Two separate reports on manufacturing - previously a tent pole of the recovery - showed the sector was weakening. A report from the Institute for Supply Management showed manufacturing activity contracted for a second month in a row in July as new orders improved modestly but employment dropped to a 2-1/2-year low.

ISM's index of national factory activity inched up to 49.8 from 49.7 in June, shy of economists' expectations for 50.2.A reading below 50 shows contraction in the sector. 

Forward-looking new orders remained in contraction territory but improved to 48 from 47.8. The gauge of employment slid to its lowest since December 2009 at 52 from 56.6. Exports continued to tumble and were down at 46.5 from 47.5. The index has lost 13 points since February. U.S. stocks held gains immediately following the ISM data before trading little changed mid-morning. "It reflects that we face a blizzard of question marks about the economy,'' said Patrick O'Keefe, director of economic research at J.H. Cohn in New York.

"There's a lack of confidence that we can predict where things will be six or nine months from now. Investors don't know how to deploy their resources in anticipation of that uncertain future.'' Another look at manufacturing from Markit showed the sector fared slightly better as it managed to grow, though the pace was the slowest in nearly three years.

The final Markit U.S. Manufacturing Purchasing Managers Index fell to 51.4 from 52.5 in June as it was also hurt by falling export orders. 

Overseas, manufacturing activity in the euro zone contracted for the eleventh straight month in July as the downturn deepened. As well, China's official measure of factory activity fell to an eight-month low.
Separate data showed construction spending rose modestly in June as investment in new homes and home improvement countered a drop-off in public works projects funded by the federal government.

Another report showed lending to small businesses fell in June to the lowest level since October with the Thomson Reuters/PayNet Small Business Lending Index falling to 98.5 from 103.8 in May.