Manufacturing index shows surprise rise

Sector reading inches up for second month, but it still indicates contraction.

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By Julianne Pepitone, CNNMoney.com contributing writer

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The manufacturing index hit a 28-year low of 32.9 in December. Readings below 41 are associated with recession.

NEW YORK (CNNMoney.com) -- Manufacturing sector activity rose unexpectedly in February, inching up for a second month following eleven straight months of decline, but still indicating contraction, a purchasing managers' group said Monday.

The Institute for Supply Management's (ISM) manufacturing index rose to 35.8 from 35.6 in January. Economists predicted a decline to 33.8, according to a Briefing.com consensus survey.

Index readings above 50 are considered to indicate growth, while levels below 50 signal contraction. Readings below 41 are associated with a recession in the broader economy. The index hit a 28-year low of 32.9 in December.

"Everyone is so pessimistic from first-quarter reports, so even when we see a modest gain, it's a glimmer of hope," said Sam Bullard, an economist at Wachovia.

"Future reports will tell us for sure, but we could see some slight bounce off the bottom in this range in the months to come," he added.

An uptick in the production index boosted the overall manufacturing to 36.3, up 4.2 points from January's 32.1. But employment hit a record low, falling 3.8 points to 26.1.

"A lot of people look to the employment number," Bullard said. "A record-low reading suggests continued losses going forward."

The report is a national monthly survey of purchasing managers in the manufacturing sector. The survey of members of the Tempe, Ariz.-based ISM tracks new orders, production, employment, supplier deliveries, inventories, customers' inventories, backlog of orders, prices, new export orders, imports and buying policy.

Manufacturing is considered a key indicator in assessing the strength of the economy as a whole. Rising unemployment in the U.S. and the global economic slowdown have reduced demand for American products at home and abroad.

Zero industry growth

All 18 of the manufacturing industries - including categories such as chemical products, apparel and machinery - reported continuing contraction in February, though at less severe levels than in previous reports. None of the industries reported growth in orders or employment.

Other recent economic data has also reflected the lack of growth. On Monday, the Commerce Department reported that in January construction spending dropped to its lowest level in more than four years.

On Friday the government reported that the U.S. economy shrank at a 6.2% pace in the last three months of 2008, much worse than analysts' estimates of 3.8%. It marked the biggest contraction in the economy in more than 25 years. Another Friday report revealed consumer confidence hit a three-month low.

Outlook

Despite February's slight uptick, the manufacturing index is still far off healthy levels and will require consistent, significant gains, Bullard said.

He predicted the index will remain at similar levels for the next four to five months and begin trending higher for the rest of 2009.

"As inventories are used up, manufacturers won't have a choice," he said. "We'll likely first see the pickup in durable goods like appliances and electrical equipment."

Individual industries should see an overall gain in the coming months, Bullard added.

"When they've hit rock bottom, it's means we'll see at least a small rise from those lows," he said. "They can fall only so far."

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