July 17 (Bloomberg) -- Manufacturing in the Philadelphia region shrank in July for an eighth straight month as orders and employment sank.

The Federal Reserve Bank of Philadelphia's general economic index improved to minus 16.3 from minus 17.1 in June, the bank said today. Negative readings signal a decline. The measure averaged 5.1 last year.

The housing recession, now in its third year, has depressed demand for building equipment and materials and hurt consumer spending. Demand may keep slowing in coming months after the government finishes distributing tax rebate checks, indicating factories won't rebound.

``We're going to continue to see declines in manufacturing output,'' said Kevin Logan, senior market economist at Dresdner Kleinwort in New York, in an interview with Bloomberg Television. ``As manufacturers see the final demand for their products go down and inventories go up, they have to slow production and that means less employment.''

Economists forecast the gauge would improve to minus 15 this month, according to the median of 56 projections in a Bloomberg News survey. Estimates ranged from a minus 22 to minus 5.

Another report today showed builders began work in June on the fewest single-family homes in 17-years, signaling the real- estate recession continues to deepen. A change in the building code in New York led to a jump in construction of condos and apartments in the Northeast that unexpectedly propelled overall housing starts up 9.1 percent, the Commerce Department said.

More Claims

First-time claims for jobless benefits rose last week, the Labor Department also reported. Rising benefits reflect a weakening job market.

The Philadelphia Fed's measure of new orders was little changed at minus 12.1 from minus 12.4 last month. The shipments measure dropped to minus 8 from minus 6.7.

An index of prices paid climbed to 75.6, the highest level since 1980, from 69.3. A gauge of prices received decreased to 28.8 from 29.7, the Philadelphia Fed report showed.

``The pricing numbers are important too because it indicates that we're in a period of stagflation,'' said Dresdner's Logan. In the 1970's, the U.S. had 10 percent inflation and 10 percent unemployment, he said. Now, ``we're looking at 5 percent unemployment and 5 percent inflation. It's a sort of stagflation light.''

Boosting Prices

U.S. Steel Corp., the second-largest U.S.-based metal producer, will boost prices for flat-rolled steel by $40 to $1,100 a ton, to pass on rising costs, two people familiar with the matter said July 11.

Fed Chairman Ben S. Bernanke told lawmakers in semiannual testimony earlier this week that inflation risks have ``intensified.'' At the same time, he dropped his June assessment that risks to the economic expansion had diminished, indicating policy makers aren't ready to raise interest rates to contain prices.

The Philadelphia Fed index measuring the manufacturing outlook for the next six months dropped to 18 from 21.3.

Today's report follows one by the New York Fed earlier this week that showed manufacturing in that state shrank less than forecast this month.

Exports

International demand has helped some factories keep running, preventing production from falling as much as in past economic downturns. The U.S. trade deficit narrowed in May as exports increased 0.9 percent, the Commerce Department said on July 11.

The Institute for Supply Management's factory index averaged 49.3 in the first six months of this year. During the 2001 recession, it averaged 43.5. Readings less than 50 signal contraction.

The Fed reported yesterday that industrial production rose 0.5 percent in June, more than forecast, helped by a jump in utility output and increased manufacturing of autos and computers.

Some manufacturing companies are prospering. Allegheny Technologies Inc., a metals maker that supplies Boeing Co., earlier this week boosted its profit forecast for the second quarter.

Allegheny is benefiting from ``our product, market, and geographic diversification,'' Chief Executive Officer Pat Hassey said in a statement.

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

Last Updated: July 17, 2008 10:27 EDT