However, the rate of decline has slowed, and the overall economy appears to be growing modestly, the National Association of Purchasing Management said.

In March, the NAPM's index of business activity rose to 43.1 from 41.9 in February. An index above 50 signifies growth in manufacturing, while a figure below 50 means contraction.

"This index is designed to show the momentum in the economy and the momentum is not getting worse," said Gary Thayer, chief economist at A.G. Edward & Sons. "It's still negative but the decline has slowed down, so to speak."

The report is closely watched because it is one of the first indications of economic activity in March in the important manufacturing industry. The figures are based on a survey of purchasing executives who buy the raw materials for manufacturing at more than 350 industrial companies.

"The overall picture is one of continued decline in manufacturing activity during the month of March," said Norbert J. Ore, who oversees the monthly survey for the NAPM. "The manufacturing sector is in its eighth month of decline and appears to lack drivers sufficient to stimulate recovery."

A level of the NAPM index below 42.7 generally indicates a contraction in the overall economy, said Ore, adding that the average for the first three months of the year of 42.1 percent corresponds to a 0.2 percent decrease in GDP.

However, the March number alone indicates a 0.1 percent increase in the GDP, Ore said.

Thayer said he was encouraged that the index had increased for a second month in a row after slumping to 41.2 in January, the lowest reading since March 1991.

In order to exceed 50 — e.g. grow again — manufacturers will have to restrain production until consumers buy the goods that are sitting in inventory.

"Once that inventory is reduced, they'll start producing at a more normal pace again," Thayer said.

The continued contraction was not a surprise as analysts were expecting a level of 42.

Even though manufacturing activity faltered, construction spending rose in February for the fourth month in a row as lower interest rates helped to keep demand stable.

The Commerce Department reported Monday that the value of construction projects nationwide ticked up by 0.6 percent to a seasonally adjusted annual rate of $834.2 billion, an all-time high.

The markets were mixed following the release of the survey, with the Dow Jones industrial average up 71 points to 9,950 and the Nasdaq composite index off 8 points to 1,832.

The news of the continued struggles within the manufacturing sector comes amid a spate of recent reports indicating that the economy is foundering.

On Thursday, the Commerce Department reported the gross domestic product grew at an annual rate of just 1 percent in the October-December quarter, the worst showing since a 0.8 percent growth rate in the second quarter of 1995. A drop in spending on big-ticket items by businesses and consumers accounted for most of the weakness.

The Federal Reserve has slashed interest rates three times this year in an attempt to boost economic growth by lowering borrowing costs, thus encouraging consumer and business spending.