July 16 (Bloomberg) -- Manufacturing in the Philadelphia region shrank at a faster pace than forecast as sales and employment deteriorated.

The Federal Reserve Bank of Philadelphia’s general economic index fell to minus 7.5 from a nine-month high of minus 2.2 in June, the bank said today. Negative numbers signal contraction. A report from the Labor Department showed claims for jobless benefits fell last week to the lowest level since January, depressed by shifts in the timing of auto plant shutdowns.

The factory report ran counter to figures yesterday from the New York Fed showing manufacturing in that region contracted at the slowest pace in more than a year. Lean inventories and government efforts to revive auto sales through cash incentives have set the stage for a gradual recovery in output at General Motors Co. and Chrysler Group LLC following their bankruptcies.

“The worst of times in manufacturing is behind us, but we haven’t even started to approach good times,” said Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania. “This number is disappointing but it tends to bounce around quite a bit. It seems to be maybe stabilizing a little bit negative at this point.”

Economists forecast the Philadelphia index would decline to minus 4.5, according to the median of 53 projections in a Bloomberg News survey. Estimates ranged from 5 to minus 10.8.

Auto Shutdowns

Initial jobless claims dropped by 47,000 to 522,000, lower than forecast, in the week ended July 11, from a revised 569,000 the prior week. The total number of people collecting unemployment insurance plunged by a record 642,000, also reflecting seasonal issues surrounding the closures at carmakers, a Labor analyst said.

The distortions may persist for another week or two, the analyst said. Claims tend to be volatile at this time of the year, when automakers idle workers while they re-equip factories to build new models.

Treasury securities rose after the Philadelphia Fed’s report, sending the yield on the benchmark 10-year note down to 3.57 percent at 4:22 p.m. in New York from 3.61 percent late yesterday. Stocks rose, with the Standard & Poor’s 500 Index gaining 0.9 percent to 940.74.

Another report today showed confidence among U.S. homebuilders rose this month to the highest level since September. The National Association of Home Builders/Wells Fargo index of builder confidence increased to 17 from 15 in June as measures of sales and of prospective buyer traffic gained.

Fewer Sales

The Philadelphia Fed’s shipments gauge decreased to minus 9.5 from 2.1, which was the first positive reading since May 2008 and the highest since December 2007, the month the recession began. The employment index fell to minus 25.3 from minus 21.8 in June, signaling payrolls fell at a faster pace.

Today’s report also showed manufacturers were less upbeat about the future. The Philadelphia Fed’s expectations index for the next six months fell to 51.9 from 60.1 in June, which was the highest level since September 2003.

Another regional survey this week showed manufacturing shrank at a slower pace. The New York Fed’s general economic index for July rose to minus 0.6, the highest level since April 2008, from minus 9.4 the prior month, the bank said yesterday.

Slump Abates

Separate Fed data yesterday showed industrial output fell 0.4 percent in June, the smallest decline in eight months.

Total business inventories shrank at a record $87.1 billion annual rate in the first quarter, subtracting 2.2 percentage points from gross domestic product. Economists estimate companies continued to slash stockpiles in the second quarter, setting the stage for expansion in the second half of the year.

The government is scheduled to release its first estimate of second-quarter GDP on July 31. Economists surveyed by Bloomberg News earlier this month estimated the economy contracted at a 1.8 percent pace from April through June and projected a return to growth in the second half of 2009.

Nucor Corp. Chief Executive Officer Dan DiMicco said June 24 the second-largest U.S. steelmaker may boost plant operating rates to as much as 60 percent of capacity in the third quarter as customers use up inventories.

Operating rates in the industry had dropped to about 40 percent after the economy worsened in the credit crisis.

More Production

“We have seen distributors begin to order at a level consistent with real demand,” DiMicco said in a Bloomberg Television interview. “We will not be happy, and our competitors will not be happy, until we are north of the 80 percent levels again.”

Manufacturing may also be boosted in coming months as automakers Chrysler and General Motors resume production at some plants shutdown while the companies went through bankruptcy. GM exited its restructuring July 10 and Chrysler emerged from bankruptcy protection on June 10.

Alcoa Inc. Chief Executive Officer Klaus Kleinfeld said July 7 he’s “very optimistic” about sales as the Chinese economy and the U.S. automotive industry start to recover.

To contact the reporter on this story: Courtney Schlisserman in Washington cschlisserma@bloomberg.net

Last Updated: July 16, 2009 16:29 EDT