By Vivian Chu

NEW YORK (Reuters) - U.S. stocks ended a quiet session slightly higher on Friday, capping their third straight week of gains, after a report showing surprisingly strong growth in manufacturing in the Midwest reassured investors that an economic upswing is under way.

Early Friday, the National Association of Purchasing Management-Chicago said its monthly index of business activity rose to 58.9 in August from 55.9 in July, easily beating forecasts of 55.5. The report suggests U.S. factories may see faster growth and should start adding to payrolls in manufacturing, the hardest-hit sector in the recession.

The Dow Jones industrial average .DJI rose 41.61 points, or 0.44 percent, to 9,415.82. The broader Standard & Poor's 500 Index .SPX added 5.19 points, or 0.52 percent, at 1,008.03. The technology-laced Nasdaq Composite Index .IXIC gained 10.40 points, or 0.58 percent, to 1,810.58.

For the week, the blue-chip Dow rose 0.72 percent -- its fourth straight up week -- while the S&P 500 gained 1.51 percent and the Nasdaq rose 2.56 percent.

"(The Chicago PMI) helped gains. It's not that the economic data coming out is overly positive, it's just that it's not negative," said Adam Tracy, director of listed trading at Thomas Weisel Partners in San Francisco. "It shows the second-half recovery is still on track."

TRADING FLOORS QUIET

However, trading floors were quiet and volume was paltry, as many market players got an early start to the long Labor Day holiday weekend. U.S. stock markets will be closed on Monday.

"The market's pretty volatile and volume is very light, so it doesn't take much to move markets up. We had big swings in the last few days on low liquidity," Tracy said.

Stocks have risen sharply since hitting year-lows in early March, as investors have bet on a strong economic recovery picking up later this year. For the month of August, the blue-chip Dow gained 1.97 percent, the S&P 500 rose 1.79 percent, and the Nasdaq is up 4.35 percent.

Both the Dow and the S&P 500 have risen for six straight months, while the Nasdaq has racked up seven in a row. It was the longest stretch of monthly gains for both the Dow and Nasdaq since 1995, and the longest streak of up months for the S&P since 1998, according to market research firm MarketHistory.com.

In other news on the economy on Friday, the government said U.S. personal spending surged in July, the latest sign of a solidifying economic rebound, though personal income rose slightly less than expected.

A separate survey said U.S. consumer sentiment fell in August, as a stagnant labor market made Americans a bit gloomier, but still far more optimistic than they were during the Iraq war. The University of Michigan's final August index of consumer sentiment fell to 89.3, below forecasts of 90.5, from 90.9 in July.

RADIOSHACK RISES

Among stocks making headlines, RadioShack Corp. RSH.N shares rose, after the No. 3 U.S. consumer electronics retailer forecast earnings in the current quarter above Wall Street expectations. RadioShack shares rose 90 cents, or 3.05 percent, to $30.40.

Novellus Systems Inc. NVLS.O fell, a day after it backed its quarterly financial targets but warned of a $70 million charge to write down older chip making equipment that would deepen its net loss. Shares of Novellus, which makes equipment used to build microchips, fell 89 cents, or 2.18 percent, to $39.96.

Shares of Kmart Holding Corp. KMRT.O shot up, after the discount retail chain reported late Thursday a much narrower quarterly loss, its first results since it emerged from Chapter 11 bankruptcy protection in May. Shares of Kmart, which filed for bankruptcy in January 2002, rose $1.23, or 4.18 percent, to a new year-high of $30.67.