The U.S. Institute for Supply Management Index (formerly the NAPM Index) came in stronger than expected for December.

The December ISM index jumped to 48.2 from 44.5, although it remained below 50, which is the benchmark for signaling economic contraction. December is the 17th straight month the index has remained below 50.

BMO Nesbitt Burns notes that the forward-looking new orders component surged to 54.9, “a good sign that ISM will continue to move back toward the 50 reading that would indicate the factory recession has bottomed”.

BMO points out that analysts will suggest that the rise in vehicle production in January/February is a key driver of the improvement in ISM. “It will be crucial that some sector step forward to accept leadership from the auto sector by March, when assemblies are scheduled to put on the brakes. Still, that may be no problem. We will have to wait and see.”

TD Bank economists say that the slowdown in the pace of contraction offers hope that the sector will pull out of its 15-month downturn in the near term. “There were several notable bright spots in today’s numbers. The report suggested that production, new domestic orders and import activity increased in the month, the first expansions recorded since September 11. Moreover, the report showed that manufacturers continued to make headway on controlling costs by slashing payrolls and inventories, which will help many manufacturers weather the downturn. And, the prices paid sub-component indicated that input prices retreated again in the month, also helping to alleviate stress on sagging bottom lines.”

TD says, “All told, this report adds to the mounting evidence that the blow to manufacturing activity post September 11th was not fatal and the sector was actually taking tentative steps on the road to recovery as 2001 drew to a close.”

Nonetheless, the U.S. economy remains fragile TD says, and risks abound, keeping the timing a recovery uncertain.