Activity in the manufacturing sector continued to contract in the month of April, according to a report released by the Institute for Supply Management on Friday, although the pace of contraction slowed by more than economists had expected.

The ISM said its index of activity in the sector rose to 40.1 in April from 36.3 in March, with a reading below 50 indicating a contraction in the sector. Economists had been expecting a more modest increase to a reading of 38.4.

Commenting on the increase, Norbert J. Ore, chair of the ISM Manufacturing Business Survey Committee noted, While this is a big step forward, there is still a large gap that must be closed before manufacturing begins to grow once again.

A notably slower pace of contraction in new orders contributed to the improvement in the sector, with the new orders index jumping to 47.1 in April from 41.2 in March. Production also contracted at a slower pace, with the production index rising to 40.4 from 36.4.

While the employment index also rose to 34.4 in April from 28.1 in the previous month, the reading remains at relatively low levels, reflecting continued weakness in the labor market.

The report also showed that the inventories index edged up to 33.6 in April from 32.2 in March, although it continued to indicate a contraction for the thirty-sixth consecutive month.

Peter Boockvar, equity strategist at Miller Tabak, noted, There is a high correlation to the sharp fall in inventory levels and the increases seen in new orders.

The question for the economy is what happens after inventories are refilled, will the end demand be there to sustain the manufacturing rebound, Boockvar added.

On the inflation front, the prices index rose to 32.0 in April from 31.0 in March, indicating the seventh consecutive month of contraction in prices.

The ISM's national manufacturing report largely mirrored the regional reports, which showed a continued contraction but at a much slower pace.

On Thursday, the Institute for Supply Management - Chicago said its regional manufacturing index rose to 40.1 in April from 31.4 in March. Economists had expected a more modest increase to a reading of 35.0.

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