U.S. Midwest manufacturing activity expanded for the second straight month in March, according to a report released on Thursday, and the data supported optimism for a recovery in the U.S. economy.

The National Association of Purchasing Management-Chicago index rose to 55.7 in March from 53.1 in February. Last month's reading marked the first time the index pointed to an expanding regional manufacturing economy in 18 months.

A reading below 50 generally suggests a contraction in the manufacturing sector, and a reading above 50 signals expansion.

"They were very encouraging numbers. They showed continued improvement in the economy. It supports the outlook for recovery this year," said Gary Thayer, chief economist at A.G. Edwards & Sons.

Economists polled by Reuters predicted the index would post a reading of 53.8.

The NAPM-Chicago's prices-paid component held steady at February's level at 51.2.

The employment component rose to 43.1 from February's 36.3.

Another bright spot in the report was the new orders component, whose 62.6 reading was the highest in 26 months, according to the NAPM-Chicago.

Earlier on Thursday, the University of Michigan's final March consumer sentiment index beat expectations slightly and rose from February's level. Traders were closely watching the data after the Conference Board's March consumer confidence survey on Tuesday jumped sharply on better job prospects and business conditions.

Investors have been debating the timing and magnitude of expected interest rate hikes from the Federal Reserve. After the NAPM-Chicago index's release, fed funds were pricing in about a 60 percent chance that the central bank will raise rates a quarter point in May. Last week, that probability reached about 80 percent.

The overnight bank lending rate currently sits at a 40-year low of 1.75 percent.