Dec. 17 (Bloomberg) -- Manufacturing in New York expanded this month at the weakest pace since May as orders slowed and companies cut inventories.

The New York Federal Reserve Bank's general economic index fell to 10.3, lower than forecast, from 27.4 in November, the bank's Buffalo branch said today. Readings greater than zero signal expansion.

The economy is cooling after accelerating in the third quarter as the housing-market recession and reduced access to credit hurt corporate and consumer spending. Export gains alone won't be enough to make up for slowing domestic demand, economists said.

``This report portends a small drop in national manufacturing activity,'' Steven Wood, president of Insight Economics LLC in Danville, California, said in a note to clients. ``Factory activity of New York-based firms grew much more moderately in December.''

Economists had forecast the index would drop to 20, according to the median of 39 projections in a Bloomberg News survey. Estimates ranged from 10 to 27.

The index measuring the manufacturing outlook for the next six months rose to 32.4 from 30.5 in November, today's report showed. A measure of expectations for orders six months from now fell to 29, the lowest since September 2001.

Orders Outlook

The drop in the outlook for orders suggests ``the growth in manufacturing is probably going to slow down,'' said Kevin Logan, senior market economist at Dresdner Kleinwort in New York. ``We haven't seen it that low since 2001, and that's perhaps a signal that things are slowing.''

The measure of current new orders dropped to 14.3 from 24.5 last month. A gauge of shipments decreased to 21.1 from 32.2, the report showed. The index of inventories fell to minus 10, the lowest level since May, from minus 1.2.

Today's report is among the first measures of December factory health. The Philadelphia Fed is scheduled to release its general economic index on Dec. 20 and the Institute for Supply Management will release its national report on Jan. 2.

The Empire and Philadelphia Fed reports last month showed greater growth than the national factory index, probably partly because of their greater sensitivity to exports, economists said. Exports rose in October to a record $141.7 billion, the Commerce Department said on Dec. 12.

Regional Comparison

``Empire has tended to outperform the other regional indexes,'' said David Sloan, senior economist at 4Cast Inc. in New York. ``The question is, is this index going to continue to outperform, and therefore point to more weakness for the other measures, or is this index now falling in line.''

Today's New York Fed report showed the index of prices paid for raw materials dropped to 35.0 this month from 42.9 in November, which had been the highest in more than a year. The measure of prices received rose to 12.5 from 11.9.

Higher commodity costs continue to put pressure on companies. Crude oil prices fell to $91.27 a barrel on the New York Mercantile Exchange on Dec. 14. Prices reached a record $99.29 a barrel on Nov. 21.

The producer price index jumped 3.2 percent in November, the most in 34 years, the Labor Department reported on Nov. 13. Excluding food and fuel, expenses rose 0.4 percent, which was twice what economists surveyed by Bloomberg News had forecast.

Companies are not passing on the full brunt of their cost increases to their customers.

Pepsi Bottling Group Inc., the world's second-largest soda distributor, forecast 2008 profit that trails analysts' estimates because of higher raw-materials costs. The Somers, New York-based bottler said Dec. 13 that it may boost prices by 4 percent next year, which won't cover the 6 percent increase in costs of good sold.

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

Last Updated: December 17, 2007 09:54 EST