The institute said its manufacturing index registered 62.0 last month, up from 61.1 in June. That was in line with the consensus forecast of analysts.
An index reading above 50 indicates expansion, while one below 50 indicates that manufacturing activity is contracting. The gauge has been above 50 since June of last year.
"July represents a good start for the third quarter, and the outlook continues to be very encouraging as new orders and production accelerated during the month," Norbert J. Ore, chairman of the institute's survey committee, said in a statement accompanying the report.
The U.S. economic expansion appeared to slow at the end of the second quarter, and the manufacturing survey is the first indication that growth could pick up again in the third quarter.
In Washington, the Commerce Department reported that construction spending slipped 0.3 percent in June after expanding a revised 0.1 percent in May. The industry is particularly sensitive to interest rates, which have been on the rise since spring.
The construction report was weaker than economists expected and represented another sign that the economy hit a rough patch early in the summer.
The Institute for Supply Management, which is based in Tempe, Ariz., said in its report that its new orders index registered 64.7 in July compared with 60.0 in June. The production index advanced to 66.1 last month compared with 63.2 the month before.
Employment, supplier deliveries and inventories all expanded more slowly in July than June, as did prices. The price index reading of 77.0 in July, compared with 81.0 in June, remained "an issue," the institute said.
"Energy prices remain a major concern for purchasers, as prices are at or near record highs," the institute said.
Ore said that the overall index reading has been above 60 for nine consecutive months.
"This is the longest period of growth above 60 percent since the 12-month period of July 1972 through June 1973," Ore said. The index peaked at 72.1 in January 1973, he added.
Last week, the Commerce Department reported that the U.S. economy grew at an annual rate of just 3 percent in the spring, a dramatic slowdown from the rapid pace of the past year, as consumer spending fell to the weakest rate since the last recession.
The size of the slowdown caught economists by surprise.
Many were looking for stronger second quarter growth of 3.6 percent, according to a survey conducted by CBS MarketWatch.