ByBridgeNews The latest report from the National Assn. of Purchasing Management (NAPM) suggests U.S. manufacturing contracted for the twelfth straight month in July, but economists say it also indicates the sector is reaching a bottom. NAPM says its index of economic activity fell to 43.6% in July from 44.7% in June, surprising economists who had expected a reading of 44.5%. A reading above 50% indicates the manufacturing economy is growing, while a result below 50% signals it is shrinking. "The overall picture is one of continued decline in manufacturing activity during the month of July," says Norbert J. Ore, chairman of the NAPM committee that conducts the survey. The U.S. manufacturing sector appears "to continue to lack drivers that will stimulate recovery," he says. "Manufacturers continue to back off from major capital investments as capital expenditures again hit a low for the history of the index." Still, economists say that while a major bounce is not likely any time soon, manufacturing could recover after a few months at current levels. The July inventory index dropped to a 19-year low of 35.8% compared with 40.8% in June. The drop in this index is positive news because reduced inventory levels would help boost production immediately once stronger demand emerges. The virtually flat reading in production also was encouraging, economists say. The production index stood at 46.4% in July, compared with 46.2% in June. The drop in the prices index is also an indication that inflation is not a problem at the moment, helping manufacturers to keep costs under control. The prices index stood at 38.7% in July, down from 42.3% in June. "All in all, I would consider it a very positive report," says Eric Green, an economist at Paribas Capital Markets. "You're looking at basically a situation where the manufacturing sector has bottomed out." Green predicts that the main NAPM index could move back up above 44.0% as early as August. Mark Vitner, an economist at First Union, agrees that the report shows manufacturing is reaching bottom. The results are still getting worse, but the rate of deterioration is slower than it was in June, he says. The employment index increased to 37.2% from 36.3% in June, raising hopes that the pace of layoffs may have slowed down, he says. Still, the sector is far from increasing its hiring, he adds. He predicts the manufacturing sector will recover late this year.