Jan. 15 (Bloomberg) -- Manufacturing in New York state slowed to the weakest pace in nine months in January, as new orders stalled and employment fell for a fourth straight month.

The Federal Reserve Bank of New York's general economic index fell to 9.0, from a revised 9.8 in December, the bank said today. The larger-than-forecast decline included the lowest indicator of new orders since May 2005. Readings greater than zero signal expansion.

Some manufacturers remain hesitant to ramp up production as an extended housing slump, reduced access to credit and a softer labor market raise concern the economy may slip into recession, economists said. Soaring costs for energy and raw materials also are limiting factory business.

``There's certainly less optimism about demand,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. Still, the growth implied in the index ``doesn't signal any further weakening in manufacturing in January'' for the rest of the country, he said.

The report provides one of the month's earliest clues to the state of manufacturing nationwide. Similar data for the Philadelphia region will be released Jan. 17. New York's economy is less vulnerable to the auto slump and more exposed to financial services, economists said.

Economists forecast the New York manufacturing index would fall to 10 from an originally reported 10.3 in December, according to the median of 46 estimates in a Bloomberg News survey. Projections ranged from 4 to 16.6.

Orders, Employment

The New York Fed's measure of new orders fell to 0.04 from 13.2 the prior month, and a measure of unfilled orders gained to 1.2 from minus 10.

The employment index dropped to 2.4, the lowest since December 2005, from 5 a month earlier.

Separately, a Commerce Department report today showed sales at U.S. retailers unexpectedly fell in December, capping the weakest year since 2002. The Labor Department said producer prices in the U.S. dropped 0.1 percent after a 3.2 percent surge in November that was the biggest in 34 years.

A gauge of shipments fell to 15.8 from 20.4, the report showed. The index of inventories improved to a minus 4.9 from minus 10.

The index measuring the manufacturing outlook for six months from now declined to 19.4 from 34.7, today's report showed.

Nationwide, manufacturing growth shrank the most in almost five years in December, according to a Jan. 2 report from the Institute for Supply Management.

Prices

Today's report also showed the index of prices paid for raw materials increased to 40.2 from 35 the prior month. A measure of prices received rose to 18.3 from 12.5.

The New York Fed's general economic index averaged 17.2 in 2007, less than the 20.2 average in 2006.

Today's figures included annual benchmark revisions for the New York Fed's monthly index going back to 2001.

Some companies in the New York region that are benefiting from demand include Corning Inc., the biggest maker of glass for liquid-crystal displays. The Corning, New York-based company said on Jan. 8 that fourth-quarter sales and profit met its forecasts. Corning will report full results on Jan. 28.

Rising expenses are hurting others. Pepsi Bottling Group Inc., the world's second-largest soda distributor, last month forecast 2008 profit that trails analysts' estimates. The New York-based company also said it may boost prices by 4 percent to cushion higher costs of materials such as sweetener and plastic.

2008 Outlook

Tomorrow, another Fed report may show that U.S. industrial production including mining and utilities fell 0.2 percent in December after a 0.3 percent gain the prior month, according to economists' median forecasts. Manufacturing accounts for about four-fifths of industry.

Economic growth will average 1.5 percent in the first six months of 2008, matching the fourth quarter's pace, according to the median estimate of 62 economists surveyed by Bloomberg News from Jan. 3 to Jan. 8. The rate of expansion would be the weakest since the last nine months of 2001.

To contact the reporter on this story: Shobhana Chandra in Washington schandra1@bloomberg.net.

Last Updated: January 15, 2008 10:05 EST