Manufacturing index signals growth soon
By Julianne Pepitone, contributing writer
Last Updated: August 3, 2009: 11:04 AM ET

NEW YORK ( -- Manufacturing activity rose significantly in July, suggesting that while the sector remains in contraction, there's a possibility of growth in the current quarter, a purchasing managers' group said Monday.

The Tempe, Ariz.-based Institute for Supply Management's (ISM) manufacturing index reading of 48.9 beat estimates from economists, who expected a jump to 46.5 from June's 44.8, according to a consensus survey.

July's report marks the 18th straight month of contraction in the sector. Still, ISM signaled cautious optimism.

"Overall, it would be difficult to convince many manufacturers that we are on the brink of recovery, but the data suggest we will see growth in the third quarter if the trends continue," the report said.

The month-to-month improvement indicates that the rate of contraction has slowed, but not reversed. Manufacturing is a key gauge of the strength of the overall economy.

The monthly report is a national survey of ISM members, who are purchasing managers in the manufacturing sector. Index readings above 50 signal growth, while levels below 50 indicate contraction. Readings below 41.2 are associated with a recession in the broader economy.

"Even though the index is still in contraction, it's above that recession threshold," said Sam Bullard, economist at Wachovia. "These numbers are stronger, and definitely significant."

The data track new orders, production, employment, supplier deliveries, inventories, customers' inventories, backlog of orders, prices, new export orders, imports and buying policy.

Of the 18 manufacturing sectors, six reported growth -- including categories such as transportation equipment, appliances and paper products. The 11 that reported contraction included machinery and food.

New orders snap decline: The key new orders component jumped to 55.3 in July, from 49.2. New orders are an indicator of manufacturing activity in the near future.

The rise in new orders broke nine straight months of decline, and "it's encouraging to see that index jump above the expansion mark," Bullard said.

Employment: The employment component rose to 45.6 in July, up 4.9 points from the previous month.

Despite the index's increase, it marks the 12th consecutive month of decline in employment. Consistent readings above 49.7 are generally tied to an increase in government data on manufacturing employment, the report said