The Institute for Supply Management's (ISM) monthly Purchasing Managers' Index rose to 49.9 in January, just shy of the key 50 level mark. A reading above 50 would indicate the sector, about one-sixth of U.S. economic activity, was expanding.

January's reading, the highest since August 2000, was above market expectations for 49.4 and up from December's revised reading of 48.1. ISM revised its 2001 December survey to reflect its annual updating of seasonal adjustment factors.

"While the manufacturing decline is now in its 18th month, some industries are starting to show significant signs of recovery as both new orders and new export orders are improving," said Norbert Ore, chair of the ISM's Manufacturing Business Survey Committee.

The ISM's New Orders Index, a gauge of demand for factory goods in the pipeline, was little changed at 55.3 in January, after December's massive surge to a revised 55.5. New Export Orders rose to 50.8 percent in January, up from December's revised 47.6 percent reading.