WASHINGTON -- The U.S. economy climbed out of the hole and started moving ahead in May as new orders to manufacturers shot up to their highest level since the start of last summer, according to a report by plant purchasing managers released yesterday.

The report by the National Association of Purchasing Managers added to other signs that the recession is drawing to a close, leaving monetary policy at the Federal Reserve in neutral. "I would think that for the immediate future, the Fed is on hold," said Richard Peach, deputy chief economist for the Mortgage Bankers Association.

"Clearly the data are a little bit better recently, and as a result, I think the Fed will be unwilling to budge unless the employment report is real bad," said Lawrence Chimerine, president of Radnor Consulting Services Inc., a financial advisory firm in Wayne, Pa.

The Labor Department is scheduled to report on unemployment for May this Friday.

The purchasing managers' report was based on a survey of 300 industrial firms and produced an index for May of 45.4%, up sharply from 42.1% in April. The increase marked the index's fourth monthly rise in a row and its highest reading since last August, when Iraq invaded Kuwait. Equally significant, the rise put the index over 44%, which is defined by the purchasing managers as the level taht must be exceeded to indicate that the overall U.S. economy is expanding.

Although the report still showed that the manufacturing sector continued to decline, the rate of descent slowed for the fourth consecutive month. "Now that the overall economy has begun to expand again, the next milestone for improvement is the end of the decline in the manufacturing sector," said Robert J. Bretz, who directed the purchasing managers' survey of 300 industrial firms.

Mr. Bretz added, "With inventories at very low levels and inflation in check, if not declining, the manufacturing economy appears poised to grow."

The new orders index for May jumped to 50.6% from 45.9% in April, ending 10 consecutive monthly declines and marking the highest reading since last June. Because new orders are so important to companies, the figures suggested manufacturers will soon be stepping up production and eventually jobs, analysts said.

In fact, the purchasing manager production index bounded up to 48.8% in May from 43.1% in April, marking the highest level since last August. That could mean production in manufacturing will resume as early as next month, the purchasing managers said.

"The recovery isn't guaranteed yet, but we should bet on it at this point," said Roger Brinner, chief economist for DRI/McGraw-Hill Inc. in Lexington, Mass. "The next step is for employment to start coming back, and with inventories down, I believe that can take place fairly quickly." DRI/McGraw-Hill is sticking with its forecast that the U.S. economy will expand at an inflation-adjusted rate of 3% to 3.5%. in the second half after "treading water" in the second quarter, said Mr. Brinner.

"This combines with other indicators that a cylical recovery is unfolding," said Joan Schneider, senior domestic economist for Continental Bank in Chicago. Smaller monthly declines in nonfarm payrolls, stable automobile sales, a rising stock market, gains in home sales, and higher disposable personal income all point toward a rebound said Ms. Schneider.

On Friday, the Commerce Department reported that the index of leading economic indicators in April advanced for the third month in a row, led by manufacturers' new orders for consumer goods. A separate report showed new orders for manufactured goods in April jumped 1.8%, the first rise since last October.

However, analysts cautioned that it will take time for employers to start hiring more people than the number entering the labor force each month, which is what is needed for the jobless rate to start falling. Even with lean inventories, sales have to show enough strength to increase output on a sustained basis.

Economists said they still expect nonfarm payrolls to show another decrease in May. Estimates of five economist who were interviewed ranged from reductions of 30,000 to 100,000, and the general view was that Fed officials will not lower rates in response.

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