Philadelphia Area Factory Index Falls to -7.5 in July

By Courtney Schlisserman

July 16 (Bloomberg) -- Manufacturing in the Philadelphia region shrank at a faster pace than forecast as sales and employment deteriorated.

The Federal Reserve Bank of Philadelphia’s general economic index fell to minus 7.5 from a nine-month high of minus 2.2 in June, the bank said today. Negative numbers signal contraction.

The report runs counter to figures yesterday from the New York Fed showing manufacturing in that region contracted at the slowest pace in more than a year. Lean inventories and government efforts to revive auto sales through cash incentives have set the stage for a gradual recovery in output at General Motors Co. and Chrysler Group LLC following their bankruptcies.

“We’re probably a month or two away from the auto recession ending for factories and probably for the economy,” Michael Gregory, a senior economist at BMO Capital Markets in Toronto, said before the report. “There probably is room for further paring of inventories but seems to be a lot of the moving has already occurred.”

Economists forecast the index would decline to minus 4.5, according to the median of 53 projections in a Bloomberg News survey. Estimates ranged from 5 to minus 10.8.

A report from the Labor Department showed the number of Americans filing claims for unemployment benefits fell last week to the lowest level since January, depressed by shifts in the timing of auto plant shutdowns.

Auto Shutdowns

Initial jobless claims dropped by 47,000 to 522,000, lower than forecast, in the week ended July 11, from a revised 569,000 the prior week. The number of people collecting unemployment insurance plunged by a record 642,000, also reflecting seasonal issues surrounding the closures at carmakers.

The Philadelphia Fed’s shipments gauge decreased to minus 9.5 from 2.1, which was the first positive reading since May 2008 and the highest since December 2007, the month the recession began. The employment index fell to minus 25.3 from minus 21.8 in June, signaling payrolls fell at a faster pace.

The measure of new orders rose to minus 2.2 from minus 4.8 the prior month. The index of prices paid rose to minus 3.5 from minus 13. Prices received decreased to minus 21.5 from minus 16.6.

The headline index is a separate question unrelated to the individual measures and some economists consider it a gauge of business sentiment.

Optimism Dims

Today’s report also showed manufacturers were less upbeat about the future. The Philadelphia Fed’s expectations index for the next six months fell to 51.9 from 60.1 in June, which was the highest level since September 2003.

Another regional survey this week showed manufacturing shrank at a slower pace. The New York Fed’s general economic index for July rose to minus 0.6, the highest level since April 2008, from minus 9.4 the prior month, the bank said yesterday.

Separate Fed data yesterday showed industrial output fell 0.4 percent in June, the smallest decline in eight months.

Total business inventories shrank at a record $87.1 billion annual rate in the first quarter, subtracting 2.2 percentage points from gross domestic product. Economists forecast companies continued to slash stockpiles in the second quarter, setting the stage for expansion in the second half of the year.

The government is scheduled to release its first estimate of second-quarter GDP on July 31. Economists surveyed by Bloomberg News earlier this month estimated the economy contracted at a 1.8 percent pace from April through June and projected a return to growth in the second half of 2009.

Boost Capacity

Nucor Corp. Chief Executive Officer Dan DiMicco said June 24 the second-largest U.S. steelmaker may boost plant operating rates to as much as 60 percent of capacity in the third quarter as customers use up inventories.

Operating rates in the industry had dropped to about 40 percent after the economy worsened in the credit crisis.

“We have seen distributors begin to order at a level consistent with real demand,” DiMicco said in a Bloomberg Television interview. “We will not be happy, and our competitors will not be happy, until we are north of the 80 percent levels again.”

Manufacturing may also be boosted in coming months as automakers Chrysler Group LLC and General Motors Co. resume production at some plants shutdown while the companies went through bankruptcy. General Motors exited its restructuring July 10 and Chrysler emerged from bankruptcy protection on June 10.

Alcoa Inc. Chief Executive Officer Klaus Kleinfeld said July 7 he’s “very optimistic” about sales as the Chinese economy and the U.S. automotive industry start to recover.

“Things are bottoming out, and they are even coming back in some sectors,” Kleinfeld said in a Bloomberg Television interview. “I’d mention the automotive sector” as one area of improvement, he said.

To contact the reporter on this story: Courtney Schlisserman in Washington cschlisserma@bloomberg.net