By Bob Willis
June 15 (Bloomberg) -- Manufacturing in the New York region this month contracted at a faster pace as sales and inventories declined, showing the economy is still months away from a sustained recovery.
The Federal Reserve Bank of New York’s June general economic index fell to minus 9.4, less than forecast, from minus 4.6 the prior month, the bank said today. Readings below zero for the Empire State index signal manufacturing is shrinking.
U.S. companies are likely to keep cutting stockpiles until sales improve, indicating orders and production will be restrained. The New York Fed’s factory gauge of the outlook for the next six months climbed to the highest level in almost two years as the drawdown in goods on hand clears the way for factories to ramp up output in coming months.
“The road to recovery in manufacturing is going to be long and gradual,” said Ryan Sweet, a senior economist at Moody’s Economy.com in West Chester, Pennsylvania. “At some point manufacturers will cut inventories to below final demand and that will set the stage for a recovery in production.”
Stocks extended losses following the report and Treasury securities rose. The Standard & Poor’s 500 index was down 1.4 percent to 932.82 at 9:40 a.m. The yield on the 10-year Treasury note decreased to 3.72 percent from 3.79 percent late on June 12.
Less than Forecast
Economists projected the Empire State index would hold unchanged at minus 4.6, according to the median of 43 estimates in a Bloomberg News survey. Forecasts ranged from 5 to minus 8.1.
The International Monetary Fund today raised its outlook for the U.S. and called for steps to reduce concern about rising public debt and inflation. The lender forecasts the world’s largest economy will contract 2.5 percent this year before expanding 0.75 percent in 2010. In April, the IMF projected the economy would contract 2.8 percent this year.
International holdings of long-term U.S. financial assets, a haven for investors during the global financial crisis, rose at a slower pace in April as China, Japan and Russia trimmed their holdings of Treasuries, the government also reported today. Total net purchases of long-term equities, notes and bonds rose a net $11.2 billion, compared with buying of $55.4 billion in March.
Growing Optimism
Factory executives in the New York Fed’s district, which encompasses New York state, northern New Jersey and one county in Connecticut, turned more optimistic about the future. The gauge measuring the manufacturing outlook climbed to 47.8, the highest level since July 2007, from 43.8.
The New York Fed’s measure of new orders increased to minus 8.2 from minus 9 and a gauge of shipments fell to minus 4.8 from 1.3. The index of inventories decreased to minus 25.3 from minus 21.6.
The index of prices paid increased to minus 5.8 from minus 11.4, and the gauge of prices received rose to minus 12.6 from minus 27.3. A measure of employment improved to minus 21.8 from minus 23.9.
The headline New York Fed survey number conveys the general impression of executives on whether activity is increasing or decreasing, and isn’t a composite of the other readings.
‘Disappointing’ Reading
Although the main reading was “disappointing from the perspective of the stabilization story, the details of the report were not as weak as the headline,” John Ryding, chief economist at RDQ Economics in New York, wrote in a note to clients.
Today’s report is one of the earliest measures of regional manufacturing this month. The Philadelphia Fed report, due June 18, may show manufacturing in that region contracted at a slower pace in June, according to the Bloomberg survey median.
Regional and national purchasing manager surveys have shown a declining rate of contraction in recent months, one sign the worst of the manufacturing slump may have passed. Still, General Motors Corp. and Chrysler LLC’s plant closings as part of their bankruptcy reorganizations portend the auto industry will weaken further before it gets better.
Economists surveyed by Bloomberg News June 1 to June 8 projected the U.S. economy would grow at an average 1.2 percent pace in the second half of the year after falling by 2 percent in the second quarter. They also estimated the jobless rate will climb to 10 percent by the end of the year.
Signs of Improvement
Some companies, particularly technology and industrial- materials firms, are seeing signs the outlook is improving.
Armonk, New York-based International Business Machines Corp. last month said it’s “ahead of pace” to meet its 2010 earnings forecast.
Alcoa Inc., the largest U.S. aluminum producer, said May 29 that distributors of the lightweight metal are showing renewed buying interest and will generate a “giant sucking sound” of demand when the global economy revives.
Distributors “know if the green shoots turn over to become demand, they will not be able to supply,” Alcoa Chief Executive Officer Klaus Kleinfeld said at a presentation in New York. “The distribution chain will generate this giant sucking sound of demand.”
To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net
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