Sept. 21 (Bloomberg) -- Philadelphia-area manufacturing unexpectedly shrank this month for the first time in three years, suggesting the U.S. economic slowdown may be spreading beyond housing.
The Federal Reserve Bank of Philadelphia's general economic index declined to minus 0.4 from 18.5 in August, the biggest monthly drop since January 2001. Readings below zero signal contraction. The New York-based Conference Board said in a separate report that its index of leading economic indicators fell 0.2 percent for a second straight month in August.
Treasury securities surged and stocks fell on signs that manufacturing, which had been taking up some of the slack from a slumping real estate market, may be starting to falter. A sputtering economy may prompt Fed policy makers to keep holding interest rates steady into next year.
``This is a warning sign,'' said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania. ``I don't think we can jump to the conclusion yet that manufacturing has hit a wall, but we may be starting to see some greater slowdown than people expected.''
The Philadelphia Fed's factory report showed orders and sales declined. The data were in stark contrast to a report from the New York Fed on Sept. 15 that showed a faster pace of growth as shipments and order backlogs increased.
``If this weakness in Philadelphia-area manufacturing is corroborated in other indicators for September, which we think is unlikely, then we will have to reconsider our view that the Fed will raise rates at one of the remaining meetings this year,'' said John Ryding, chief U.S. economist at Bear Stearns & Co. in New York, in a note to clients.
Federal Reserve
Fed policy makers expect the slowing economy and past increases in interest rates to whittle away at inflation pressure through next year. The central bank yesterday kept its interest-rate target for overnight loans between banks at 5.25 percent following 17 consecutive quarter-point increases from June 2004 to June of this year.
``The moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market,'' Fed officials said yesterday in their statement.
The benchmark 10-year Treasury note rose 9/16, pushing down the yield 7 basis points to a six-month low of 4.66 percent, at 1:11 p.m. in New York. The Standard & Poor's Index of 500 stocks fell 6 points, or 0.5 percent.
``The slowdown we started seeing a few months ago is now well in hand,'' said Richard DeKaser, chief economist at National City Bank in Cleveland. ``We're probably about three or four months into what's likely to be a 12-month episode of a slowing economy, as per the Fed's intentions.''
Jobless Claims
There are still no signs that companies have resorted to firing workers as the economy slows. A separate report today showed jobless claims last week rose by 7,000 to 318,000, a level that economists say is consistent with a healthy labor market.
``It's a firm labor market,'' said David Watt, a senior economist at BMO Nesbitt Burns in Toronto. ``Incomes are rising, suggesting things aren't going so badly for the U.S. consumer.''
There are still no signs that companies have resorted to firing workers as the economy slows. A separate report today showed jobless claims last week rose by 7,000 to 318,000, a level that economists say is consistent with a healthy labor market.
``It's a firm labor market,'' said David Watt, a senior economist at BMO Nesbitt Burns in Toronto. ``Incomes are rising, suggesting things aren't going so badly for the U.S. consumer.''
While the Conference Board's leading index isn't signaling a recession, Fed policy makers remained concerned about the risk that a deepening slump in the housing market might drag the rest of the economy down with it.
No Recession Sign
It would take a 3.5 percent annualized decline to signal contraction in the economy, according to the Conference Board. The last time the index met that criterion was in September 2000, six months before the start of the last recession.
Seven of the 10 components of the leading index declined in August, while three increased.
Gasoline prices that held near record levels in August siphoned cash from consumers' pockets. Combined with a slump in the housing market, high fuel costs made Americans less optimistic about the economy in coming months.
Consumer expectations as measured by the University of Michigan subtracted 0.13 percentage point from the August index of leading economic indicators. Michigan's expectations index fell to 68 in August from 72.5 in July. It rebounded this month to the highest since January as gasoline prices declined.
Factory Workweek
A decrease in the factory workweek subtracted from the August leading indicators, shaving 0.06 percentage point. The U.S. Labor Department said earlier this month that manufacturing workweek slipped to 41.3 hours in August from 41.4 in July.
Building permits also subtracted 0.06 percentage point from the leading indicators index. Permits, a sign of future construction, fell to the lowest in four years last month.
The economy will expand at an annual rate of 2.6 percent in the final three months of 2006, down from an average of 4.3 percent in the first half, based on the median estimate of economists surveyed by Bloomberg News earlier this month.
To contact the reporter on this story: Bob Willis in Washington at [email protected]
Last Updated: September 21, 2006 13:36 EDT
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