Is There A Manufacturing Rebound In the Works?

NEW YORK (CNNMoney.com) -- A key measure of manufacturing activity rose for the fourth straight month in April, suggesting the sector may be stabilizing even though the indicator has been at the contraction level for 15 months in a row, a purchasing management group said Friday.

The Tempe, Ariz.-based Institute for Supply Management said its manufacturing index rose to a reading of 40.1 in April from 36.3 in March (see chart above, data here). A reading below 50 indicates manufacturing activity is shrinking. Economists had forecast a reading of 38.4, according to consensus estimates gathered by Briefing.com.

"The decline in the manufacturing sector continues to moderate," said Norbert Ore, chair of the ISM's survey committee, in a statement. "This is definitely a good start for the second quarter."

The index also showed that new orders and production increased in April compared with March.

According to the ISM:

A PMI in excess of 41.2%, over a period of time, generally indicates an expansion of the overall economy. Therefore, the PMI indicates contraction in both the overall economy and the manufacturing sector. Ore stated, "The past relationship between the PMI and the overall economy indicates that the average PMI for January through April (37%) corresponds to a 1.3 percent decrease in real GD. In addition, if the PMI for April (40.1%) is annualized, it corresponds to a 0.3% decrease in real GDP annually."

MP: Assuming that the PMI continues to increase in May and June from the 40.1 April reading, there is a good chance that second quarter real GDP will be positive, or at least very close to zero. Also, the 7.2 percentage point increase in the PMI from the December bottom is the largest four-month increase in the index since January 2004.

As Larry Kudlow pointed out last night on "The Kudlow Report," the March index for New Orders (47.2) is now almost back to the level of 50 that would indicate an expansion manufacturing activity (see chart above). Further, the 19.1 percent increase in the New Order Index from Dec. to April is the largest 4-month increase in the index in more than 7 years (since March 2002), and the 14.1 percent increase in the Production Index over the same period is the greatest 4-month increase since February 2002.