Aug. 16 (Bloomberg) -- Manufacturing in the Philadelphia region unexpectedly stalled in August, as orders and sales cooled.

The Federal Reserve Bank of Philadelphia's general economic index dropped to zero in August, the dividing line between expansion and contraction, from 9.2 in July, the bank said today. The gauge was at the lowest point of the year after averaging 5.8 from January though July.

The figures run counter to Fed reports yesterday showing gains in New York manufacturing and U.S. industrial production. Still, companies in the Philadelphia region added to payrolls at the fastest pace in almost three years and turned more optimistic on future prospects.

``The U.S. manufacturing sector is still strong, but caution is warranted,'' said Meny Grauman, an economist at Scotia Capital in Toronto. ``With consumer spending already soft, economic growth is very dependant on the business side of the equation.''

Economists expected the index to fall to 8.6, according to the median of 54 projections in a Bloomberg News survey. Estimates ranged from minus 1.6 to 18.

Builders started work on the fewest homes in a decade in July as the industry showed no sign of recovering from an 18- month recession, a report today from the Commerce Department also showed. The 6.1 percent drop to an annual rate of 1.381 million was larger than forecast.

Stocks, Bonds

Stocks tumbled for a fourth day after Countrywide Financial Corp., the nation's largest mortgage lender, tapped an $11.5 billion credit line and said turmoil in global markets is drying up financing for home loans. Treasuries securities advanced, pushing two-year yields to the lowest in 22 months, on concern about the inability to trade other securities in the credit markets.

The Philadelphia Fed's employment index jumped to 21.2 in August, the highest since September 2004, from 4.1 last month. The index measuring optimism about the future rose to 36.2, a level last exceed in November 2004, from 30.4.

The headline index isn't composed of the individual measures and is considered by some economists to be a gauge of business sentiment.

The new orders measure fell to 7.1 from 11.3. Shipments dropped to 12.4 from 20.3.

Smaller Cost Increases

Business also got a reprieve from rising costs. The index of prices paid fell to 15.4 from 28.1, the biggest drop since October 2005. The gauge of prices received decreased to 6.8 from 8.8. The inventory index slumped to minus 4.8 from 0.8. A negative number means companies are decreasing stockpiles.

A similar report by the New York Fed yesterday showed manufacturing in that state this month held near the highest level in more than a year. The two regional surveys provide early clues to the health of manufacturing nationwide, which makes up about 12 percent of the economy.

Economic indicators based on surveys, which in most cases were filled out weeks ago, probably don't reflect the current turmoil in financial markets, said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut.

``Though it is not obvious to me that the average manufacturer has seen much of an impact over the past week or two,'' Stanley said in a note to clients.

Lean Inventories

Businesses in June had enough inventory on hand to last 1.27 months at the current sales pace, near the lowest in a year, a Commerce Department report this week showed.

A government report this week showed the U.S. trade deficit unexpectedly narrowed in June as exports soared to a record, suggesting American factories would benefit. A weaker dollar and expanding economies in Asia, Latin America and Europe are propelling demand for U.S. goods, economists said.

Rohm & Haas Co., the world's biggest producer of acrylic- paint ingredients, said overseas demand helped keep second- quarter revenue growing.

In specialty materials, which accounted for 60 percent of revenue, ``strong sales growth outside the U.S. offset continued weakness in the U.S. building and construction markets,'' said Raj Gupta, the Philadelphia-based company's chief executive officer, in a statement last month. ``The weak U.S. building and construction markets remain a challenge.''

Still, the housing slump is hurting others. DuPont Co., the third-biggest U.S. chemical maker, reported an unexpected decline in second-quarter profit as slumping U.S. auto and housing markets eroded demand for paint and kitchen countertops. North American housing demand probably won't improve until ``well into 2008,'' DuPont Chief Executive Officer Charles O. Holliday Jr. said July 24 on a conference call with analysts.

Industrial production rose in July, a separate Fed report yesterday showed. Capacity utilization, which measures the proportion of plants in use, grew to the highest since September, the Fed said.

The Institute for Supply Management is scheduled to release its national manufacturing report for August on Sept. 4.

To contact the reporter on this story: Joe Richter in Washington jrichter1@bloomberg.net

Last Updated: August 16, 2007 13:02 EDT