Oct. 15 (Bloomberg) -- A gauge of manufacturing in New York sank in October to the lowest level since the index started in 2001, as the freeze in global credit markets prompted businesses to pull back.

The Federal Reserve Bank of New York's general economic index fell to minus 24.6 from minus 7.4 in September, the bank said today. Readings below zero for the Empire State index signal manufacturing activity is shrinking. Every component other than prices was negative for the month.

The financial crisis has prompted lenders to restrict credit, worsening the slowdown in spending by consumers and businesses and leading the Treasury to channel $250 billion in taxpayer funds to banks. Manufacturers also are hesitant to expand output as exports weaken and the global economy heads closer to a recession.

The Empire index is ``reflecting both a deteriorating economic situation and the turmoil and dislocations in the credit markets,'' said Steven Wood, president of Insight Economics LLC in Danville, California. ``This report suggests that national manufacturing activity likely contracted moderately in October.''

Retail Sales Slump

The Commerce Department reported today that sales at U.S. retailers dropped in September by 1.2 percent, the most in three years. A Labor Department report showed prices paid to U.S. producers fell 0.4 percent in September, the second consecutive decline.

The Empire State index was projected to fall to minus 10 from an originally reported minus 7.4 in September, according to the median of 48 estimates in a Bloomberg News survey. Projections ranged from 0 to minus 23.9.

The gauge measuring the manufacturing outlook for six months from now dropped to 24.2 from 43.1 the prior month.

The measure of new orders fell to minus 20.5 from 4.4 the prior month. A gauge of shipments fell to minus 8.9 from 0.6 and the index of inventories decreased to minus 17.1 from minus 2.3.

The index of prices paid eased to 31.7 after 44.8, and the gauge of prices received also slowed to 20.7 from 24.1.

A measure of employment registered minus 3.7 after minus 4.6 the prior month.

Today's report is one of the earliest regional takes on manufacturing this month. A report from the Philadelphia Fed, due tomorrow, may show manufacturing in the Philadelphia region contracted in October, according to the Bloomberg survey median.

Also tomorrow, the Fed may report industrial production including mining and utilities fell 0.8 percent in September after a 1.1 percent drop in August, according to economists' forecasts. Manufacturing accounts for four-fifths of the industrial production report.

Alcoa Inc., the largest U.S. aluminum producer, last week reported that third-quarter net income dropped by more than half as prices fell and slowing economic growth hurt demand. New York-based Alcoa plans to suspend its share buyback program and curtail non-essential projects to conserve cash.

To contact the reporter on this story: Shobhana Chandra in Washington schandra1@bloomberg.net

Last Updated: October 15, 2008 09:47 EDT