The U.S. National Association of Purchasing Managers Index came in stronger than economists’ expected in August, helping to allay some fears of a U.S. recession .

The NAPM index for manufacturers rose to 47.9, its highest level since last November, and up from 43.6 in July. All of the sub-components rose during August, with the exception of prices paid. BMO Nesbitt Burns calls this reading, “the first important evidence that the worst of the industrial slowdown may be drawing to an end.”

Firms continue to cut inventories aggressively, but both the production and orders measures jumped above the 50-mark for the first time this year. “The wide gap between production and inventories suggests that even a small rise in demand could translate into another meaningful rise for the overall index in the months ahead,” BMO notes. The employment index also rose a little.

However, economists are cautious about getting too optimistic in the wake of the report. “Purchasing managers saw a glimmer of sunshine in August, but that doesn’t guarantee fair skies for the factory sector, or the economy as a whole, in the quarters ahead,” says CIBC World Markets.

“Even within these improved figures, there are hallmarks of problems down the road. If still-more factory layoffs lie ahead, as anecdotal evidence also suggests, how long will consumers keep buying the goods the manufacturing sector produces? Moreover, the jump in the export orders index looks spurious in light of recent signs of weakness in America’s key trading partners.”

“Prices paid suggests that deflation is alive and well in the manufacturing sector,” says BMO, “as price pressures have vanished amid a glut of spare capacity. Even if the worst is over for manufacturing activity, the deflationary pressures will hit profit margins and keep inflation at bay.”

CIBC says that today’s NAPM report is consistent with its expectation that the U.S. manufacturing sector will hit a near-term bottom in the third quarter, but recover to only very marginal growth thereafter.

“The bounce in the headline NAPM index is an encouraging signal that the deep inventory correction is nearly over. However, the next big test for the economy is whether manufacturing can turn around before job losses in the rest of the economy sink consumer spending. With price pressures absent, and overall growth barely above zero, interest rates are still expected to fall further,” concludes BMO.