Bloomberg News

Manufacturing in Philadelphia Region Unexpectedly Contracts

May 17, 2012

An employee welds a specialized metal product in the shop at the Amuneal Manufacturing Corp. plant in Philadelphia. Photographer: Paul Taggart/Bloomberg

An employee welds a specialized metal product in the shop at the Amuneal Manufacturing Corp. plant in Philadelphia. Photographer: Paul Taggart/Bloomberg

Manufacturing in the Philadelphia region unexpectedly shrank in May for the first time in eight months, reflecting a drop in orders and employment.

The Federal Reserve Bank of Philadelphia’s general economic index fell to minus 5.8 this month, the lowest reading since September, from 8.5 in the previous month. Economists forecast the gauge would rise to 10, according to the median estimate in a Bloomberg News survey. Readings less than zero signal contraction in the area covering eastern Pennsylvania, southern New Jersey and Delaware.

Slower economies in Europe and China may restrain exports and limit orders to U.S. factories, which have been a mainstay of the almost three-year-old expansion. At the same time, increased demand for automobiles, which sold in the first quarter at the fastest pace in four years, is helping underpin manufacturing.

“We’re in a choppy and uneven recovery,” said Sean Incremona, a senior economist at 4Cast Inc. in New York, who had the lowest forecast in the Bloomberg survey. “This is a disappointment. It only goes to show us that the recovery as a whole isn’t gathering any momentum.”

Stocks extended earlier losses immediately after the report and then recovered. The Standard & Poor’s 500 Index fell 0.3 percent to 1,320.91 at 10:36 a.m. in New York on concern about Europe’s debt crisis.

Estimates from 59 economists surveyed by Bloomberg ranged from 2.5 to 14.

Other Reports

Other reports today showed More Americans than forecast filed applications for unemployment benefits last week, the Bloomberg Consumer Comfort Index dropped to the lowest level in almost four months, and the index of leading economic indicators unexpectedly decreased in April.

The Philadelphia Fed’s new orders measure decreased to minus 1.2, the lowest level since September, from 2.7 in April. A gauge of employment dropped to minus 1.3 in May, the lowest level since June 2010, from an 11-month high of 17.9.

A measure of shipments gauge climbed to 3.5 from 2.8, while the index of the average workweek decreased to minus 5.4 this month from minus 2.3 in April.

The Philadelphia Fed’s report also showed inflation was retreating. The bank’s gauge of prices paid dropped to 5, the lowest level since July 2009. The measure of prices received declined to minus 4.5, the first negative reading since August.

Sentiment Gauge

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

The region’s manufacturers also turned more pessimistic about the future. The index of the outlook for six months from now dropped to 15, the lowest since August, from 33.8 in April.

The Philadelphia Fed’s index was at odds with other regional data. Manufacturing in the New York area expanded at a faster pace in May, a report this week from the New York Fed showed. The bank’s general economic measure, the so-called Empire State index, climbed to 17.1 from April’s 6.6.

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

Deere & Co. (DE:US) and other U.S. manufacturers continue to benefit from a global economy that is showing “impressive strength and endurance,” said Susan Karlix, manager of investor communications for the Moline, Illinois company.

Demand Holding Up

“Demand continues to be strong, especially for high- horsepower equipment, a reflection of positive conditions in the global farm economy,” Karlix said in a May 16 earnings call. “And used equipment levels are low. In fact, we ended the second quarter with used tractor and combine levels well below a year ago.”

Manufacturing is also being boosted by a stronger auto industry. Auto sales in the first quarter averaged an annual rate of 14.5 million, the strongest since the same three months in 2008, according to Ward’s Automotive Group data.

Factory output, which makes up about 75 percent of industrial production, climbed 0.6 percent, a Fed report yesterday showed. Half of the gain was due to a pickup in auto production.

Even with the stronger automobile demand, Europe remains a risk to the U.S. expansion.

Several Fed policy makers said a loss of momentum in growth or increased risks to their economic outlook could warrant additional action to keep the recovery on track, according to minutes of their last meeting released yesterday.

The members of the rate-setting Federal Open Market Committee “indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough,” according to minutes of the panel’s April 24-25 meeting.

To contact the reporter on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net

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


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