U.S. manufacturing growth expanded for the third straight month in September but at a slower pace, according to a report from the Institute of Supply Management.

The ISM September manufacturing index declined to 53.7 from 54.7 in August. Analysts had expected a reading of for a 55.0.

A reading above 50 signals expansion in the industrial sector, which makes up about one-sixth of the U.S. economy. Among the index’s components, the new orders index, a sign of future growth, picked up nicely to 60.4 from 59.6.

The employment reading fell again in September, to 45.7 from 45.9, as layoffs continued. The factory sector has been the hardest hit in the recession and slow recovery, suffering job losses of more than 2.5 million over the past three years.

“The manufacturing sector continued to improve for the third consecutive month as new orders and production show evidence of a stronger economy in September. Both of these indices have grown over the past five months, which is very encouraging considering the challenges that the economy has faced in the last two years,” said Norbert Ore, chair of the Institute for Supply Management Manufacturing Business Survey Committee

“The strength in New Orders during September is a very positive sign as we move into the fourth quarter. The overall picture is better; some manufacturers are very happy with the improvement, while others are waiting for their sector to pickup,” said Ore.

Ore added that comments from purchasing and supply managers indicate softness in many industries and concerns about energy prices.

“Investors breathed a modest sigh of relief as U.S. September ISM came in at a healthy 53.7, little different than August’s 54.7 and well above the 50-mark,” comments BMO Nesbitt Burns. “It’s hard to say what was expected, since Chicago’s weak PMI reading yesterday had the markets looking for the worst.”

“Although today’s numbers mimic some of the recent weakness seen in the Philadelphia Federal Reserve index and in the Chicago Purchasing Managers’ Index, the size of the contraction in the ISM is not as large as some feared,” RBC Financial says.

“Other regional purchasing managers’ surveys, and now the national survey, have been on the healthy side. Several months of data are required to confirm a new trend. So, the September figures fit nicely with earlier strength, raising the odds that the U.S. is headed definitely in the right direction,” says Nesbitt.

TD Bank is a little more skeptical. It says the report “added to the generally downbeat tone of recent U.S. economic data”. While it allows that it is still above the 50 level, TD says, “The retreat in the headline index signals that the pace of the expansion decelerated last month — a result foreshadowed by regional manufacturing surveys like the Philly Fed and Chicago PMI, both of which revealed a slackening in activity in September.”