NEW YORK (CNNMoney.com) -- The nation's manufacturing activity contracted in January for its 12th straight month, but the rate of decline slowed, according to a Monday report.

The Institute for Supply Management, a purchasing management group based in Tempe, Ariz., said its manufacturing index was 35.6 in January.

"It's encouraging to see this rebound on the month, but you don't want to jump to conclusions," said Robert Brusca, chief economist at Fact and Opinion Economics.

Any reading below 50 indicates a slowdown, and one below 41 is typically associated with a recession in the broader economy.

Economists were expecting 32.5, nearly unchanged with the previous month, according to a consensus estimate of economists polled by Briefing.com. The revised December reading was 32.9.

In order to see an improvement in the manufacturing sector, purchasing managers said they would need to see two of the nation's hardest hit industries show a turnaround.

"Comments from our respondents indicate that it will take a recovery in automobiles and housing for the manufacturing sector to once again prosper," Norbert Ore, chair of the Institute for Supply Management Manufacturing Business Survey Committee, said in a statement.

Manufacturing is a key component in assessing the health of the economy as a whole. On Friday, the government reported that gross domestic product fell in the fourth quarter by 3.8%, the sharpest decline in 26 years.

But with consumers and businesses pulling back the reigns on spending in the recession, the manufacturing sector has suffered. "You need credit, you need confidence and you need employment," said Brusca. "The holy trinity of consumption is under attack."

The ISM report is a national survey of purchasing managers in the manufacturing sector. The monthly survey tracks new orders, production, employment, supplier deliveries, inventories, customers' inventories, prices, backlog of orders, new export orders, imports and buying policy.

The report's Prices Index showed a reading of 29 in January, compared with 18 in the previous month. The increase indicates producers are paying less to produce goods.

"On a positive note, the Prices Index continues to indicate significant deflation in the prices that manufacturers have to pay for their inputs, and this should ultimately be good for the consumer," said Ore.

The employment part of the monthly manufacturing index held steady at 29.9, offering a possible preview of the government jobs report due out on Friday.

"This extremely low reading suggests massive losses in manufacturing payrolls in data to be released on Friday," Adam York, economist at Wachovia, wrote in a report.

The government is expected to report that the unemployment rate increased to 7.5% as employers slashed 500,000 employees from their payrolls, according to a consensus estimate compiled by Briefing.com. York said that the ISM reading on employment "would suggest a 500,000-plus job loss is probable in Friday's release."