Aug. 17 (Bloomberg) -- Manufacturing in the Philadelphia area accelerated more than expected this month as orders and shipments jumped, a Federal Reserve survey showed today.

The Federal Reserve Bank of Philadelphia's general economic index rose to 18.5 in August, the highest since April 2005, from 6.0 in July. Readings above zero signal expansion. The gauge averaged 12.4 in 2005.

Companies are investing growing profits in new equipment, keeping factories busy and helping the U.S. economy withstand a slowdown in housing and consumer spending. Manufacturing, which represents 12 percent of the economy, is also getting a lift from overseas demand for products made by companies such as Wilmington, Delaware-based chemical maker DuPont Co.

``Manufacturing conditions are holding up well in the midst of high energy prices, thanks largely to business investment demand and exports,'' said Zoltan Pozsar, an economist at Moody's Economy.com in West Chester, Pennsylvania.

The Philadelphia Fed's manufacturing index was expected to rise to 9, the median forecast in a Bloomberg News survey of 47 economists. Estimates ranged from 3.5 to 12.2.

An index of new orders rose to 15.7 in August from 10.1 last month. Shipments jumped to 22.3 from 10.2, and a gauge of inventories rose to 5.6 from minus 1.8, suggesting stockpiles are growing.

A measure of prices paid fell to 45.3 from 50.3, adding to evidence that inflation pressures in the U.S. economy are easing. A gauge of prices received was unchanged at 17.1.

The report suggests that the pace of manufacturing growth will ease as the U.S. economy cools. A measure of expectations six months ahead dropped to 7.4 from 15.4 last month.

Leading Indicators

A separate index of leading economic indicators unexpectedly dropped 0.1 percent in July, reinforcing forecasts that the U.S. economy will slow in the second half of the year, according to a report today by the New York-based Conference Board.

The Federal Reserve last week kept interest rates unchanged after 17 straight increases, saying economic growth had ``moderated'' as a result of a slowdown in the housing market and the impact of higher borrowing costs and energy prices.

The economy will expand at an average annual rate of less than 2.8 percent in the second half of the year, compared with a 4.1 percent first-half pace, according to the median forecast of 69 economists surveyed from July 28 through Aug. 10.

A Fed report yesterday suggested that weakness in the auto industry is masking strength in manufacturing nationwide.

Industrial Production

Industrial production, which includes utilities and mining in addition to manufacturing, rose 0.4 percent in July following a 0.8 percent increase in June. Manufacturing expanded just 0.1 percent. Excluding autos, it gained 0.7 percent.

The Philadelphia Fed region, which encompasses eastern Pennsylvania, Delaware and New Jersey, is rich in chemical and industrial companies and has few automotive-related plants.

The Philadelphia Fed's employment index fell to 8.2 in August from 12.8 in July. The average workweek gauge rose to 12.4 from minus 2.8.

Strong overseas demand is spurring manufacturers. U.S. exports rose to a record $120.7 billion in June, led by increases in shipments of capital goods and industrial supplies, the government reported last week.

Pittsburgh-based PPG Industries Inc., the world's second- largest maker of auto paint, said second-quarter profit jumped 21 percent to a record on higher prices and demand for coatings in Asia and Europe.

``Although growth is moderating to more sustainable levels in North America, we see continued economic expansion worldwide,'' Chief Executive Officer Charles H. Bunch said in a statement on July 20.

Energy Costs

DuPont Co., the third-biggest U.S. chemical maker, on July 25 reported its sales in the second quarter rose 9 percent to Canada and Latin America and 7 percent to Asia while they fell 1 percent in the U.S.

``We've been focused very much on Asia where we see the long-term growth and we're very pleased there,'' said Charles Holliday, chairman of DuPont, on a July 25 conference call. ``The products that we think are strong in Latin American we're doing great at.''

Factories in the U.S. will ratchet back production next year as consumers spend less and companies pare investment in new equipment, according to a separate survey today by a manufacturers' group.

Manufacturing will expand 2.5 percent next year, half as fast as it's forecast to grow in 2006, the Arlington, Virginia- based Manufacturers Alliance/MAPI said. Purchases of industrial equipment will grow 4.7 percent in 2007 after an estimated 8.4 percent this year, according to the survey.

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

Last Updated: August 17, 2006 12:39 EDT