The decline in manufacturing activity slowed in March fueling optimism about a recovery but continued job losses may threaten any real economic growth in the coming months.

A report from the Institute for Supply Management (ISM) published earlier this week showed a better-than-expected climb in its manufacturing index. The headline index or PMI rose to 36.3 in March from 35.8 in February, its highest level in seven months. Analysts, on average, were expecting a reading of 36.0 in the headline index.

The ISM index is a monthly composite of five indicators with equal weights: new orders, production, employment, supplier deliveries and inventories. It is based on surveys of purchasing managers and supply executives throughout the United States in 18 industries within the manufacturing sector. A PMI reading above 50 indicates that the manufacturing sector is generally expanding while a reading below 50 indicates that it is generally declining. It frequently moves markets and is considered a key gauge of economic growth.

Source: FactSet, Institute for Supply Management

The recent uptick was led by an increase in new orders, which registered 41.2 in March, 8.1 percentage points higher than the 33.1 reading in February. Six industries reported growth in new orders including plastics and rubber products; nonmetallic mineral products; furniture; food, beverage and tobacco; computer electronics and miscellaneous manufacturing.

The ISM’s production index, edged higher to 36.4 in March from 36.3 in February, representing its third consecutive monthly increase. Only two industries, paper products and miscellaneous manufacturing, reported growth in production.

The latest overall reading offers hope that economic conditions are improving. “The rapid decline in manufacturing appears to have moderated somewhat, as the PMI remains in the mid-30s for a third consecutive month,” said Norbert Ore, chairman of the ISM, in a prepared statement. “While the PMI is slightly higher in March, the New Orders Index offers greater encouragement, as it rose above the 40-percent mark for the first time in seven months.”

The job outlook remains grim, however. ISM’s employment index advanced to 28.1, up two percentage points from February but well below the 49.7 reading that is considered an increase in manufacturing employment. The Labor Department’s latest jobs report showed unemployment rising to 8.5% in March up from 8.1% in February, the highest level since 1983 but in line with analysts’ forecasts.

When asked about the impact of the government’s fiscal and monetary stimulus efforts, 36% of the ISM survey respondents indicated that their industry will benefit. The industries that expect to benefit the most based on their responses include electrical equipment, appliances & components, miscellaneous manufacturing; nonmetallic mineral products, primary metals and machinery.