March 15 (Bloomberg) -- Manufacturing in the Philadelphia region barely grew for a second month as companies reduced stockpiles of unsold goods.

The Federal Reserve Bank of Philadelphia's general economic index fell to 0.2 in March from 0.6 the prior month, the bank said today. A positive number signals expansion. The index averaged 8.1 last year.

The decline is further evidence of the toll that slumps in housing and autos are taking on U.S. manufacturing. Another Fed report today showed factories in New York expanded at the slowest pace since May 2005. Fed Chairman Ben S. Bernanke last month predicted that efforts to reduce stockpiles will impose ``modest restraint'' on production early this year.

``Manufacturing activity is still in the doldrums based on these two important regional reports,'' said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. ``This is consistent with the inventory correction the economy is going through, as business has scaled back factory output to match better with demand.''

Economists expected the Philadelphia index to rise to 3.7, the median of 51 forecasts in a Bloomberg News survey. Estimates ranged from minus 5 to 10.

The inventory index fell to minus 3.7 this month, the lowest since May, from minus 1.9 the prior month. A negative number means stockpiles are shrinking.

Producer Prices

A larger-than-forecast increase in producer prices reported today by the Labor Department makes it harder for Fed policy makers to reduce interest rates to bolster the economy in the face of slumps in manufacturing and housing.

The producer price index rose 1.3 percent in February, the most in three months, driven by energy, food and tobacco. A separate Labor Department report showed initial jobless claims declined by 12,000 to 318,000 in the week that ended March 10.

The Philadelphia Fed's index of prices paid rose to 21.8 from 15.8, while a gauge of prices received also increased, to 16.3 from 9.4.

Responding to a special question in the survey, 59 percent of respondents said output would rise in the second quarter while 23 percent said they expected a decline.

The index of new orders rose to 1.9 from minus 0.5 in February. The shipments index increased to 6.8 from 1.7.

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

Expectations for the next six months fell to 17.4 from 20.3.

New York Report

Earlier today, the Federal Reserve Bank of New York said its general economic index dropped to 1.9 in March from 24.4 in February. A number greater than zero signals expansion.

The New York and Philadelphia surveys provide early clues to the health of manufacturing, which accounts for about 12 percent of the economy.

The Institute for Supply Management on April 2 will issue its report on manufacturing for March. The institute's index rose to 52.3 in February from a January reading of 49.3 that was the lowest since April 2003.

Industrial production declined 0.5 percent in January, following a 0.5 percent December increase, according to a Feb. 15 report from the Fed. Production may show a gain of 0.3 percent for February, according to a Bloomberg survey of economists before tomorrow's report.

Manufacturing Slides

Manufacturing, which accounts for about four-fifths of industrial production, fell 0.7 percent in January, the biggest decline since September 2005, after rising 0.8 percent.

The worst slump in residential construction in 15 years is taking a toll on companies including Philadelphia-based Rohm & Haas Co., a producer of chemicals and paints.

``Housing starts are really driving down the demand for construction materials,'' Rajiv Gupta, chief executive officer of Rohm & Haas Co., said in an interview last month. He said economic growth this year will be ``certainly not as robust as last year.''

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

Last Updated: March 15, 2007 13:22 EDT