TEMPE, AZ -- The nation's top indicator of purchasing activity rose 2.7 points in May to its highest level in eight months as the manufacturing sector slowly emerges from the recession bottom.

Still, economic activity in the manufacturing sector failed to grow in May for the 16th consecutive month, while the overall economy grew for the first time following seven months of decline, say the nation's supply executives in the latest ISM Manufacturing Report On Business.

Manufacturing contracted in May as the PMI registered 42.8%, up 2.7 points from April. A reading above 50% indicates that the manufacturing economy is generally expanding; below 50% indicates that it is generally contracting.

A PMI in excess of 41.2%, over a period of time, generally indicates an expansion of the overall economy. The year-to-date PMI -- 38.1% -- correlates to a 1% drop in real GDP. The May PMI corresponds to a 0.5% increase in real GDP annually.

The New Orders Index was 51.1% in May, 3.9 points higher than in April and breaking a 17-month negative trend.

In a statement, ISM spokesman Norbert Ore said,  "While employment and inventories continue to decline at a rapid rate and the sector continued to contract during the month, there are signs of improvement. May is the first month of growth in the New Orders Index since November 2007, with nine of 18 industries reporting growth. New orders are considered a leading indicator, and the index has risen rapidly after bottoming at 23.1%  in December. Also, the Customers' Inventories Index remained below 50% for the second consecutive month, offering encouragement that supply chains are starting to free themselves of excess inventories as nine industries report their customers' inventories as 'too low'. The prices that manufacturers pay for raw materials and services continued to decline, but at a slower rate than in April."

The recovery may be affected by a lack of supplier capacity, some participants say. One executive in the Computer & Electronic Products said, "Some amount of havoc is about to erupt, with companies pushing for increased capacity when suppliers have taken capacity offline."

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