Bloomberg News

Philadelphia-Area Manufacturing Contracts Most Since 2009

August 18, 2011

(Updates with economist’s comment in fourth paragraph.)

Aug. 18 (Bloomberg) -- Manufacturing in the Philadelphia region unexpectedly contracted in August by the most in more than two years as orders plunged and factories shed workers.

The Federal Reserve Bank of Philadelphia’s general economic index plunged to minus 30.7 this month, the lowest since March 2009, from 3.2 in July. The August gauge exceeded the most pessimistic projection in a Bloomberg News survey in which the median estimate was 2. Readings less than zero signal contraction in the area covering eastern Pennsylvania, southern New Jersey and Delaware.

Stocks extended their decline after the figures showed weaker demand from consumers and companies in the U.S. and abroad is posing a risk to the industry that spearheaded the recovery. Fewer customer inventories may indicate producers will see a smaller decrease in orders should the U.S. economy falter.

The report is “signaling a borderline recession,” said John Herrmann, senior fixed-income strategist at State Street Global Markets LLC in Boston, who projected a contraction in the measure of Philadelphia manufacturing. “The economy will be able to count less and less on manufacturing.”

The Standard & Poor’s 500 Index slumped 4.2 percent to 1,144.15 at 10:35 a.m. in New York. Treasuries climbed, pushing down the yield on the benchmark 10-year note to 2.03 percent from 2.17 percent late yesterday.

Estimates for the manufacturing gauge from the 56 economists surveyed ranged from minus 10 to 10.

New Orders Slump

The report showed the Philadelphia Fed’s new orders measure dropped to minus 26.8, the lowest since March 2009, from 0.1 in July. The shipments gauge decreased to minus 13.9, the weakest since May 2009, from 4.3 last month.

The index of prices paid fell to 12.8 from 25.1 the prior month, while the measure of prices received dropped to minus 9 from 1.1.

The employment index in the Philadelphia Fed report decreased to minus 5.2, the lowest since October 2009, from a reading last month of 8.9. A measure of the average workweek slumped to minus 14.4 in January from minus 5.4.

Among other reports today, consumer confidence in the U.S. economic outlook slumped in August to the lowest level since the recession. The Bloomberg Consumer Comfort Index’s monthly expectations gauge dropped to minus 34, the weakest since March 2009, from minus 22 in July. The weekly measure of current conditions was minus 48.3 for the period ended Aug. 14 compared with minus 49.1, which was the worst reading since mid-May.

Jobless Claims

First-time claims for jobless insurance rose by 9,000 to 408,000 in the week ended Aug. 13, Labor Department figures showed. Economists surveyed by Bloomberg News projected a rise to 400,000, according to the median forecast.

The cost of living in the U.S. rose in July by the most in four months, led by gains in food and fuel, the Labor Department also said. The consumer-price index increased 0.5 percent from June, while worker pay failed to keep pace. Adjusted for inflation, hourly wages dropped 0.1 percent in July and were down 1.3 percent from the same month a year ago.

Sales of previously owned homes unexpectedly declined in July, a report from the National Association of Realtors showed. Purchases decreased 3.5 percent to a 4.67 million annual pace, the weakest since November.

Individual measures in the Philadelphia Fed’s index don’t contribute to the headline reading, so some economists consider it a gauge of sentiment among manufacturers.

Supply Shock

Manufacturing had stabilized after the Japanese earthquake induced supply shocks in the second quarter. Factory output rose 0.6 percent in July, led by gains at the nation’s automakers, a Federal Reserve report showed Aug. 16. Production of automobiles and parts climbed 5.2 percent last month, the first gain in four months and the biggest in a year. Excluding motor vehicles, manufacturing increased 0.3 percent.

At the same time, slowing demand from U.S. consumers alongside cooling growth in emerging economies and Europe raises the risk manufacturers will temper production going forward. The world’s largest economy expanded at a 0.9 percent pace in the first half of 2011, while gross domestic product in the 17- nation euro area rose 0.2 percent in the second quarter from the prior three months, when it increased 0.8 percent.

New York-area manufacturing contracted in August for a third straight month, the Federal Reserve Bank of New York’s so- called Empire State Index showed Aug. 15. The gauge, which covers New York, northern New Jersey and southern Connecticut, has only contracted in consecutive months when the world’s largest economy has been in a recession.

‘Sit on Cash’

“Right now, until the markets shake out and we understand really where the economies are going globally, I think it behooves us to sit on cash, to hold it, in case there is a really, really bad recession that takes place,” John Craig, president and chief executive officer of EnerSys, said on an Aug. 11 call with analysts.

The Reading, Pennsylvania-based maker of industrial batteries reported first quarter earnings on Aug. 10 that fell short of analysts’ estimates.

Economists monitor Philadelphia and New York Fed factory reports for clues about the Institute for Supply Management national figures on manufacturing during the month. The ISM will release its report on Sept. 1.

--With assistance from Chris Middleton in Washington. Editor: Vince Golle

Company News: ENS US <Equity> CN

To contact the reporter on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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