Nov. 19 (Bloomberg) -- Manufacturing in the Philadelphia region expanded in November at the fastest pace in more than two years, reflecting gains in orders and sales.

The Federal Reserve Bank of Philadelphia’s general economic index rose to 16.7, higher than forecast, from 11.5 in October, figures from the bank showed today. Readings greater than zero signal growth.

Rising foreign demand and record declines in inventories are giving factories incentive to rev up assembly lines. A rebound in manufacturing has helped the economy emerge from the worst recession since the 1930s and may further support growth in coming months.

“Manufacturing conditions are improving as we get into the recovery,” said Yasmine Kamaruddin, an economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “Companies are still drawing down inventories, filling orders with what they have on stock.”

Economists forecast the Philadelphia Fed index would increase to 12, according to the median of 56 estimates in a Bloomberg News survey. Projections ranged from 3.5 to 20.

Other reports today showed the index of leading economic indicators rose and jobless claims were unchanged.

Leading Index

The Conference Board’s gauge of the economic outlook for the next three to six months rose 0.3 percent in October, a seventh consecutive gain, after climbing 1 percent the prior month. The spread between short- and long-term interest rates, a drop in jobless claims and the rally in stocks propelled the increase.

The number of Americans filing claims for unemployment benefits held at 505,000 in the week ended Nov. 14, in line with the median forecast of economists surveyed and matching a 10-month low, Labor Department figures showed. The number of people collecting unemployment insurance dropped in the prior week, while those getting extended payments jumped.

Stocks extended a global drop as Bank of America Corp. downgraded chipmakers and concern grew that the rally has outpaced the prospects for economic growth. The Standard & Poor’s 500 Index fell 1.8 percent to 1,089.52 at 11:13 a.m. in New York as Intel Corp. and Texas Instruments Inc. lost ground.

Manufacturers were less upbeat about the future, today’s report showed. Expectations for the next six months fell to 36.8 from 39.8. Factory activity nationwide accounts for about 12 percent of the U.S. economy, the world’s largest.

Reports Diverge

Other reports this week showed manufacturing decelerated. The New York Fed’s general economic index showed a slower pace of expansion in November. Meanwhile, the Fed’s national industrial production gauge for October rose less than forecast, held back by declines in auto making.

The Philadelphia Fed’s index of new orders climbed to 14.8 from 6.2 the prior month, while the shipments index increased to 15.7 from 3.3.

The measure of inventories improved to minus 17.3 from minus 31.8. A negative number means stockpiles are shrinking.

The report showed the employment index climbed to minus 0.5 from minus 6.8 compared.

As demand improves, companies may need to hire more workers, Fed Chairman Ben S. Bernanke said Nov. 16.

Job Gains

“The increases in productivity we have seen so far are so large, so strong, that I am a bit skeptical they can be maintained going forward,” Bernanke said in response to a question after the speech. Firms will find that “as demand begins to strengthen they will need to bring more workers back on.”

The Philadelphia Fed’s gauge of prices paid dropped to 14.9 after 21.3 the prior month, and an index of prices received improved to minus 1.5 from minus 4.3.

The headline index isn’t composed of the individual measures and some economists consider it a gauge of business sentiment.

A record reduction in stockpiles in the first half of this year, and continued trimming since, may help factories expand and boost the recovery in coming months. The economy will grow at a 3 percent annual rate this quarter, according to the median projection of economists in a Bloomberg News survey earlier this month.

Auto production is moderating after surging in the three months through September as “cash-for-clunkers” incentives to buy cars expired in late August.

Demand Overseas

Also helping support manufacturing, exports rose for five consecutive months through September, according to Commerce Department data shows.

“Global industrial activity and the corresponding demand for our products will continue to moderately improve through the remainder of the current fiscal year,” Kennametal Inc. Chief Financial Officer Frank Simpkins said on a conference call Oct. 29.

Latrobe, Pennsylvania-based Kennametal said fiscal first- quarter sales had risen from the fourth quarter, helped by a “modest uptick in industrial activity in certain markets.” It followed three straight quarters of declines for the toolmaker.

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

Last Updated: November 19, 2009 11:13 EST