The U.S. manufacturing sector contracted again in September, although not as much as economists had expected.

The National Association of Purchasing Managers index for September slipped to 47.0 from 47.9, although BMO Nesbitt Burns says the full impact of the terrorist attacks have yet to show through. “The survey covers activity from the middle of August to the middle of September, so the events of September 11 would have had little direct impact on the results. Even so, a sharp downswing in sentiment likely shaded the figures to the downside.”

Both new orders and production managed to hold above the 50 level last month, although both softened slightly. Anything below 50 generally indicates a recession. “This is further evidence that basic manufacturing was on the verge of turning the corner prior to the attacks,” says BMO. However, the inventory measure is still below the 40 mark, and employment has moved up to 41.2 from the low of 35.0.

Economists at TD Bank are also seeing signs that the manufacturing recession may be nearing an end. “While these signs of an eventual turnaround in the manufacturing sector may be encouraging, today’s numbers do not fully reflect the economic effects of the terrorist attacks, hence the index may well worsen in the coming months before it gets better. Moreover, activity outside of manufacturing is now showing distinct signs of slowing.”

TD indicates that concerns that overall economic conditions could weaken further will keep the U.S. Federal Reserve on high alert in the coming months. “Indeed, there is no doubt that the Fed will ease policy again at tomorrow’s FOMC meeting, with financial markets now pricing in a 50 basis point cut. Moreover, three major economic risks remain: the faltering job market keeps a damper on consumer spending in the coming months; softening global demand continues to subdue export growth; and the amount of excess capacity in the U.S. economy keeps investment spending sluggish in the near term — suggesting the Fed will ease further in November.”