NEW YORK (CNN/Money) - U.S. manufacturing activity expanded for the first time in five months in July, the nation's purchasing managers said Friday, matching Wall Street forecasts.

The Institute for Supply Management (ISM) said its index of manufacturing activity rose to 51.8 from 49.8 in June. Any number below 50 indicates contraction in the sector. Economists, on average, expected the ISM index to rise to 51.8, according to a Reuters poll.

"While many respondents mention that they fail to see the recovery in their businesses, others indicate a higher level of activity than they have seen in some time," said ISM survey committee chairman Norbert Ore. "Overall, the manufacturing sector is trending positively and appears poised to continue a pattern of growth in the second half of the year."

ISM's new orders index rose to 56.6 from 52.2 in June. The production index rose to 53.3 from 52.9 in June.

U.S. stock prices continued to sell off after the report, while Treasury bond prices reversed earlier losses. Stock traders may have been disappointed that the ISM number wasn't higher -- as Thursday's better-than-expected report from Chicago purchasing managers had suggested.

Bond traders, on the other hand, were likely reacting to signs of deflation in the "prices paid" index of the ISM report, which dropped to 53 from 56.5 in June. Bond traders hope that continuing low inflation will lead the Federal Reserve to keep short-term interest rates lower for longer.

One of the more troubling aspects of the report was a decline in the employment index to 46.1 from 46.2, indicating employers were laying workers off at a faster pace.

The Labor Department reported Friday that manufacturers cut 71,000 jobs from their payrolls in July. But that's nothing new -- manufacturers have cut jobs in every month but seven since early 1998.

In fact, the manufacturing sector's impact on the broader economy has been shrinking for several years, as many manufacturers have moved operations overseas. The sector makes up only about 15 percent of the total economy.

Nevertheless, the ISM report is closely watched as a measure of business sentiment, and Friday's report showed that, though conditions are improving, CEOs haven't exactly started popping champagne corks yet. More importantly, they're still not hiring workers.