The manufacturing sector expanded above analysts expectations in March at the fastest rate of growth since July 2004, suggesting that the economic recovery underway is picking up some steam.

When the Institute for Supply Management (ISM) released its manufacturing index at 10:00 a.m. today, it showed an increase, to 59.6% which was better than the 57% analysts expected. The number is the highest level so far this year, and much higher than the 36.4% registered in March 2009. A reading greater than 50% means manufacturing is expanding, and stronger growth is indicated as the index moves closer to 60 and beyond.

Seventeen manufacturing industries reported growth starting with apparel, leather and allied products; textile mills; electrical equipment; and appliances and components. The list also includes transportation equipment, machinery and computer and electronic products. The report suggests that growth across these manufacturing sectors is getting closer in line with what Wall Street needs to see in order to push stocks higher. In order for manufacturing to sustain and expand growth you want to see across the board that factories and the plants are working on better capacity, says Alan Lancz, president of Alan B. Lancz & Associates, an investment research and money management firm. Wall Street is expecting a V-shaped recovery, and for that to happen growth needs to occur in many sectors.

Typically, when consumer demand leads to a pick-up in manufacturing, employment tends to follow. Wall Street is particularly attuned to that issue and will look for any clues to what Friday s unemployment and nonfarm payroll numbers will bring. However, while the new orders index increased to 61.5% from 59.5% in February and production increased to 61.1%, up 2.7% , the employment index fell 1% to 55.1%. One reason could be that as manufacturing picks up, companies are increasing existing employees work hours as opposed to hiring more people, says Dean Baker, co-director of the Center for Economic and Policy Research in Washington D.C.
Still, this may be enough of a sizeable increase in the ISM index to move the market, says Lancz, but the growth will need to be sustained going forward. And investors shouldn t get their hopes up too much yet. Even with a small increase in overseas orders and business spending on equipment currently underway, unemployment remains high and wages are unchanged so the chances that consumer demand will keep growing are slim. Instead, expect this data to be another small contribution to an economic recovery that s slowly and gradually underway.

This article is an excerpt from our Early Bird markets story, which was originally published the morning of April 1.