Economic activity didn’t grow in March, but tightened less than expected.

The U.S. Institute for Supply Management reported that its index of manufacturing activity came in at 48.6 for March, up ever-so-slightly from 48.3 in February but down from 50.7 in January.

Economists had been expecting the index to drop to 47.5 for the month.

However, when the index level falls below a reading of 50, it indicates that manufacturing activity likely continues to decline, while a measure over 50 means the manufacturing economy.

Paul Ferley, assistant chief economist at the Royal Bank of Canada notes that during the 2000-01 recession, the ISM measure dropped as low as 40.8 and the institute suggests that a reading below 41.1 has historically been associated with the overall economy falling into recession. “Encouragingly the index level in March moved even further away from this threshold level,” said Ferley, in a morning commentary. “However, with declining activity evident in two areas of the economy already, the persistence of tight credit conditions pose the risk that other key expenditure areas such as business investment and consumption will come under downward pressure as well.”

“The manufacturing sector failed to grow in March as the PMI fell below 50% for the second consecutive month,” said the ISM, in a release. “This completes the weakest quarterly performance for the U.S. economy since Q2 of 2003.”

In addition, the institute’s measure noted that manufacturers’ order backlogs continued to erode as the New Orders Index also failed to grow for the fourth month in a row. U.S. manufacturers face heavy cost pressures, as the prices they pay are still rising even with slower overall demand, said the institute. But it adds that export demand is still strong enough to keep orders from crashing.

ISM’s Production Index fell to 48.7% in March, down 2% from February’s seasonally adjusted reading of 50.7%. As well, its Employment Index came in at 49.2% for the month, up 3.2% from February.

“On balance, this is a weak report,” wrote Charmaine Buskas, senior economics strategist at TD Securities. “The headline index suggests contraction in manufacturing, while sub components remain generally soft as well. The outlook for manufacturing depends heavily on external demand, and if that gives way, the sector will see even further losses.”