The National Association of Manufacturers issued a cautiously optimistic prognosis for the U.S. economy and the manufacturing sector on the eve of the Labor Day weekend, based on signs of stabilization in a number of key areas.

Among the positive indications that a recovery is starting to sprout are improvements in the housing market, increased activity in European markets, and new orders for capital goods, the group’s “Labor Day 2009” report states. However, the NAM warned of the fragility of the recovery.

“A recovery could stall out or even shift into reverse if Congress and the administration enact policies that discourage investment, hamper flexibility, or raise the costs of doing business in the United States. Prospects for good jobs, a strong manufacturing sector, and a growing economy depend on U.S. global competitiveness,” said John Engler, NAM president and CEO, in a letter introducing the report.

The Manufacturers Alliance/MAPI Quarterly Economic Forecast, released a week ago, also called for a “modest and fragile” recovery over the next two years.

Both reports attempt to read the tea leaves for one key indicator: employment levels. While NAM’s chief economist, David Huether, agrees with the Manufacturers Alliance/MAPI report that there is legitimate concern about a “jobless recovery,” his analysis calls for more than 40% of the 2 million manufacturing jobs lost during the recession to return by 2014, bringing employment in the sector back up to 12.7 million jobs.

For the overall economy, the NAM predicts, “the next few quarters will likely be marked by sluggish growth driven mainly by improvements in net exports, government spending, a slowdown in inventory sell-offs, and the effects of various stimulus measures to prop up consumer spending.” The group doesn’t expect a “sustained upturn in the private sector” until mid-2010. In 2011 and 2012, the recovery should be “in full swing and economic growth is anticipated to increase at an average rate of close to 5%.”

New orders for capital goods are rising, the report states. During the three months ended in July, core capital goods orders rose at a seasonally adjusted annual rate of 34.7%, “the fastest pace since January 2005.” As companies work down their excess inventories, the industry should see a boost in output in the second half of 2009 and into 2010, according to the study.

NAM expects manufacturing production to build slowly in 2010 and “transition to stronger growth” in 2011 to 2014. After production falls an expected 7% in 2009, it will increase 2.5% in 2010 and 6.4% in 2011 and 2012, followed by slower growth of 3.3% in 2013 and 2014, the report predicts.

That growth will fuel employment gains, 60% to 70% of which will be in five sectors: machinery, fabricated metals, aerospace and other transportation, food and beverage products, and chemicals. In 2007, these five sectors employed 43% of the manufacturing labor force, a share that the NAM expects will climb to 48% by 2014.

The industry association cited computer and electronics manufacturing as the one sector in which employment will decline over the 2010 to 2014 period, due to rapid increases in productivity. That sector employed 9% of the manufacturing workforce in 2008 and is expected to employ only 6% in 2014.