Factories in Philadelphia Region Grow at Faster Pace (Update3)

March 18 (Bloomberg) -- Manufacturing in the Philadelphia region expanded in March at the fastest pace so far this year as factories lead the U.S. economic recovery.

The Federal Reserve Bank of Philadelphia’s general economic index rose to 18.9, in line with the median forecast of economists surveyed by Bloomberg News and the highest level since December, from 17.6 in February. Readings greater than zero signal growth.

Factories keep adding workers and increasing production to replenish depleted inventories and meet rising global demand. Gains in manufacturing may be the spark that ignites a broader economic expansion, leading to increases in payrolls and consumer spending.

“The manufacturing sector has been the one bright spot for the economy in recent months,” said Scott Brown, chief economist at Raymond James Associates Inc. in St. Petersburg, Florida. “Clearly a sustainable recovery will require an improvement in the jobs. We’re right on the cusp of new hiring.”

Stocks were little changed after the report. The Standard and Poor’s 500 Index fell 0.2 percent to 1,163.87 at 10:40 a.m. in New York after reaching a 17-month high yesterday.

Economists forecast the index would rise to 18, according to the median of 59 projections in a Bloomberg News survey. Estimates ranged from 13 to 23.

Prices Unchanged

Other reports today showed the cost of living was unchanged in February, fewer Americans filed claims for jobless benefits last week, and the index of leading indicators climbed in February for an 11th consecutive month.

The Philadelphia Fed’s employment index climbed to 8.4, the highest level since August 2007, from 7.4 in February.

The new orders measure dropped to 9.3 from 22.7 a month earlier and shipments fell to 13.6 from 19.7.

The index of prices paid increased to 38.6 from 32.4 in January. Prices received decreased to minus 0.4 from 3.7.

The overall Philadelphia Fed index isn’t composed of the individual measures, so some economists consider it a gauge of sentiment among manufacturers.

Almost 57 percent of those answering a special question posed by the Philadelphia Fed said they anticipated boosting production in the second quarter. About 48 percent said the gain in the next three months would exceed this quarter’s pickup.

Earlier this week, figures from the New York Fed showed business activity in that region expanded for an eighth straight month in March. Another central bank report showed industrial production increased in February for an eighth month and capacity utilization rose to the highest level in more than a year.

Fed Policy

Fed policy makers this week said the economic recovery is constrained by unemployment and persistent weakness in real estate and pledged to keep the benchmark interest rate near zero for an “extended period.” The Federal Open Market Committee has kept the federal funds rate target for overnight loans between banks in a range of zero to 0.25 percent since December 2008.

The U.S. economy is forecast to grow at an average 2.75 percent pace the first half of the year, according to the median estimate of economists surveyed by Bloomberg earlier this month. While that is slower than previously estimated, economists boosted their projections for consumer spending.

Rising exports are among the reasons factories have seen a pickup in demand and were able to add to payrolls in January and February. At the same time, sales are outpacing inventory building, meaning there is still room for companies to pickup production and spending to fill shelves.

Inventories at U.S. businesses were little changed in January and sales climbed 0.6 percent, the Commerce Department said March 12.

“Our backlog remains strong and our bookings are on plan,” Herley Industries Inc. Chief Executive Officer Richard Poirier said in a statement March 11. “We anticipate a number of large orders in the second half of the fiscal year.”

Lancaster, Pennsylvania-based Herley, which makes components and systems for the aerospace, defense and medical industries, said revenue in its fiscal second quarter rose to $46.6 million, from $40 million a year earlier. It did not include projections for future quarters.

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