June 21 (Bloomberg) -- Manufacturing in the Philadelphia region accelerated in June at the fastest pace in more than two years as orders surged.

The Federal Reserve Bank of Philadelphia's general economic index jumped more than forecast to 18 this month, the highest since April 2005, from 4.2 in May, the bank said today. A positive number signals expansion. The index averaged 8.1 last year.

Companies, after trimming excess inventories, are revving up assembly lines to meet increasing U.S. and overseas demand. A pickup in manufacturing and improving business investment will help the economy strengthen during the rest of the year, economists said.

``Manufacturing is solid,'' said Jeffrey Roach, chief economist at Horizon Investments in Charlotte, North Carolina. ``The second quarter is going to post some fairly strong growth numbers.''

Roach had the highest forecast, 15, among economists in the Bloomberg survey.

Economists expected the Philadelphia index to rise to 7, the median of 54 forecasts in a Bloomberg News survey. Estimates ranged from 1.5 to 15.

Other reports today showed a gauge of leading U.S. economic indicators strengthened more than forecast last month and jobless claims rose.

Leading Index

The Conference Board's index of leading economic indicators increased 0.3 percent after a 0.3 percent drop in April. The New York-based group's gauge points to the direction of the economy over the next three to six months.

The Labor Department reported that initial jobless claims unexpectedly rose last week to 324,000 from 314,000.

The Philadelphia Fed's index of new orders jumped to 18.3, the highest since March 2006, from 8.7. The shipments index eased to 5 from 9.3 and the employment measure fell to 5.6 from 12.9.

``Manufacturing activity is picking up solidly,'' said Joel Naroff, president of Naroff Economic Advisors, in Holland, Pennsylvania. ``The key was strong increases in new orders, which is always a good sign.''

The index of prices paid dropped to 29.7 after 32.3 the prior month, while a gauge of prices received rose to 5.1 from 2.2.

Outlook

Expectations for the next six months dropped to 16.7, the lowest this year, from 30.8, the report showed.

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

The Philadelphia report corroborated a similar measure last week from the New York Fed, which surged more than forecast to 25.8 from 8 in May.

The two regional surveys provide early clues to the health of manufacturing nationwide, which accounts for about 12 percent of the economy.

A Fed report on June 15 showed industrial production at factories, mines and utilities was unchanged in May following a 0.4 percent gain in April. Mild weather reduced demand for electricity and manufacturers of cars and machinery scaled back.

Other reports were more upbeat, signaling companies are replenishing stockpiles. The Institute for Supply Management's factory index rose in May to the highest in 13 months as orders jumped.

Fed Chairman Ben S. Bernanke projects the economy will grow at a ``moderate'' pace as the drag from housing wanes. The Fed's latest assessment of regional economic activity, issued this month, showed manufacturing improved in the Philadelphia district, though residential construction was ``generally slow.''

Business Investment

``Considerably more'' firms in the region have increased their capital spending plans since the beginning of the year than have trimmed them, according to the central bank's Beige Book. More than 40 percent of the manufacturers anticipated an increase in new orders, shipments and overall activity in the second half of 2007, the report said.

Innovative Solutions & Support Inc., an engineering company based in Exton, Pennsylvania, this week said it got an order to supply flat-panel display systems to American Airlines for 200 aircraft. Teleflex Inc., a Limerick, Pennsylvania-based maker of medical instruments, also said this week it won five contracts to provide respiratory devices to a health services company.

Manufacturers are also gaining from overseas demand. General Electric Co.'s transportation unit said June 13 its Grove City, Pennsylvania-based factory will make five diesel generator sets starting this month for a company based in the United Arab Emirates.

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

Last Updated: June 21, 2007 12:46 EDT