Aug. 15 (Bloomberg) -- Manufacturing in New York state expanded at a slower pace in August as companies pared inventories, a Federal Reserve report showed today.

The Fed Bank of New York's general economic index dropped to 10.3, the lowest since June 2005, from 16.6 in July. A number greater than zero signals a higher percentage of manufacturers surveyed reported an improvement in business than deterioration.

Manufacturers are working off stockpiles of unsold goods that accumulated in the second quarter, when consumer spending slowed. Gauges of new orders and shipments rose, while businesses said they were less optimistic about the outlook six months from now.

``The slowing economy is why folks are less excited about the future,'' Tim Rogers, chief economist at Briefing.com in Boston, said. ``The headwinds are more on the consumer side than on the business side. Despite what you see in the headline number, it really is a fairly strong report: you've got increases in orders and shipments.''

Economists expected the New York Fed's index to fall to 15 from an originally reported July figure of 15.6, according to the median forecast in a survey by Bloomberg News. New York state accounts for almost 5 percent of U.S. manufacturing, which in turn makes up about 12 percent of the nation's economy.

Prices paid to U.S. producers increased less than forecast in July, pointing to an easing of inflationary pressures, a separate report from the Labor Department showed today. The 0.1 percent increase followed a 0.5 percent rise in June. The core rate, which excludes food and energy, unexpectedly dropped 0.3 percent, the first decline since October.

Prices Paid

The New York Fed's index of prices paid for raw materials dipped to 44.6 this month from 50.5 in July. A measure of prices received by factories fell to 14.9 from 16.5.

The index measuring the outlook for six months from now decreased to 35.2 from 45, today's report showed.

The gauge of new orders rose to 19.1 from 11.3 in July. The shipments index rose to 14.8 from 12.3. The gauge of inventories increased to minus 9.9 from minus 12.8.

The main business conditions figure is derived from a separate question in the survey and isn't composed of the individual indexes of prices, orders and other factors.

New York manufacturing executives listed the cost of employee benefits, compensation costs and prices of resources among their top concerns in response to a series of supplementary questions in this month's survey.

Labor costs, which account for about two-thirds of the cost of goods and services, rose at a faster-than-expected 4.2 percent pace last quarter, according to an Aug. 8 government report.

Inventories

Inventory accumulation contributed 0.4 percentage point to economic growth in the second quarter after adding 0.03 percentage point in the first, according to a government report July 28. Business sales slowed in June, suggesting companies might have to restrain production to reduce stockpiles.

Energy costs are taking a toll on manufacturers and consumers alike. The average price of a gallon of regular gasoline rose to $3.04 on Aug. 9, the highest since the first week of September last year after Hurricane Katrina knocked out oil rigs and refineries on the Gulf Coast. Oil averaged $75.60 a barrel in the first 10 days of August, compared with $74.44 in July.

The pace of economic growth is projected to slow as consumers restrain spending. 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 in a Bloomberg survey of economists polled from July 28 through Aug. 10.

Federal Reserve

The Fed on Aug. 8 left its key interest rate unchanged at 5.25 percent as it paused to gauge the effects of 17 consecutive interest-rate increases.

``Economic growth has moderated from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices,'' the Fed's statement said.

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

Further clues to the health of manufacturing will come tomorrow, when the Fed reports its nationwide industrial production figures. Production, which includes manufacturing, utilities and mines, probably expanded 0.6 percent in July after rising 0.8 percent in June, economists forecast.

Eastman Kodak

Some New York manufacturers are scaling back. Rochester- based Eastman Kodak Co. on Aug. 1 posted a seventh straight quarterly loss on costs to cut jobs as the company has shifted out of traditional film into digital.

Chief Executive Officer Antonio Perez said the company may cut as many as 2,000 more jobs than previously planned, or 27,000 in all, at a cost of as much as $3.4 billion.

``We are trying to build a new digital company,'' Perez said on a conference call. ``The way things are going, we should be able to finish before the end of the year.''

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

Last Updated: August 15, 2006 09:34 EDT