Economic activity in the U.S. manufacturing sector failed to grow in May, while the overall economy grew for the 19th consecutive month.

The Institute for Supply Management said Monay its manufacturing index was 49.4% last month, up from 45.4 in April. A reading below 50 means manufacturing activity is slowing; above 50 indicates the industry is growing.

The last time the ISM index showed growth in manufacturing was in February, when it reached 50.5.

“The manufacturing sector failed to grow in May for the third consecutive month. However, there are signs of life in manufacturing as both the New Orders Index and the Production Index rose above the 50% mark after each had seen two consecutive months of decline. There is also good news on the pricing front as the Prices Index declined 12 percentage points, leaving it just above the breakeven point. Order backlogs grew in May following 10 months of decline. These are all signs of encouragement that manufacturing is recovering from the decline due to the war,” said Nobert Ore, chair of the Institute for Supply Managemen Manufacturing Business Survey Committee

The ISM index is based on a survey of the managers who buy raw materials for manufacturing companies, giving them insight into the pace of industry.

Stocks moved sharply higher after release of the manufacturing data. But it still leaves economists puzzling over the next move in U.S. interest rates.

The number was slightly better than expectations. “Although this was the third consecutive sub-50 reading on the index, the pace of the decline in manufacturing activity is decelerating, leaving the U.S. manufacturing sector virtually treading water, albeit in a still-weakened condition,” says TD Bank.

TD says that the most encouraging aspect of this morning’s report was the sharp rise in the production and new orders sub-indices. “The production sub-index rebounded by 4.5 percentage points, to 51.5, which suggests industrial production may record a positive reading in May, after declining for two successive months, and the new orders sub-index — the most forward-looking component of the ISM — jumped by 6.7 percentage points, to 51.9. Finally, the backlog of orders index also climbed back above 50, rising to 51.0 — reversing a ten-month string of declines — heralding a possible increase in production in the months ahead, as manufacturers seek to clear order backlogs.”

RBC Financial said that the index attracted plenty of attention as it is the first key industrial indicator released completely free of any influence from the Iraq war, thus providing a good reading on whether business confidence posted a bounce similar to that already shown by consumers. While it noted the increases, RBC also points out that the report showed weaker inflation. “We continue to expect steady Fed policy but this report does not fully remove the risk of further deterioration and a subsequent rate cut,” it said.

BMO Nesbitt Burns says that the report, “showed a bit of thawing from the slow period, but not enough to take Fed easing off the table. We are encouraged that the key components — production and orders — bounced solidly back above the 50 mark. We are in the optimistic camp about second-half economic growth and this looks like initial good news to us. Admittedly, much more is needed, but you have to start somewhere.”

“Fed officials have expressed the desire to take away downside risk. ISM at 49.4 is not high enough to rule out downside risk. So, these figures are on the “Fed easing” side of the ledger,” BMO concludes.

TD also said, “The outcome of the June meeting is a very close call, given the Fed’s decision to adopt an implicit easing bias on May 6th. Today’s ISM report is one of the key data points Fed officials will be studying, and the improved reading, coupled with anecdotal evidence from some survey respondents of a possible pick-up in activity may reduce the odds of an easing in monetary policy. However, there are several major pieces of data to be released for the month of May — including the reports on employment, retail sales and consumer price inflation — all of which will give the Fed a better indication of how the U.S. economy fared in its first full month post-Iraq. So, stay tuned — important information is ahead.”