New York Area Manufacturing Unexpectedly Shrank in July

Manufacturing in the New York region unexpectedly contracted for a second straight month in July as orders shrank at a faster pace, a sign the industry may be at risk of stalling.

The Federal Reserve Bank of New York’s general economic index rose to minus 3.8, less than the most pessimistic forecast in a Bloomberg News survey, from minus 7.8 the prior month. The median forecast called for an index of 5. Readings greater than zero signal expansion in the so-called Empire State Index, which covers New York, northern New Jersey and southern Connecticut.

Mounting inventories and a slowdown in consumer spending indicate a pickup in manufacturing may depend more on the strength of exports and demand for business equipment. The data underscore comments this week by Fed Chairman Ben S. Bernanke that the recovery “still needs a good deal of support.”

“We’re probably going to see a bit of cooling in the pace of manufacturing growth,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, said before the report. “Businesses built up inventory faster than they had intended because demand fell off and I would expect going forward that production slows as businesses seek to sell off that excess.”

The cost of living in the U.S. fell in June for the first time in a year as the biggest drop in energy costs since 2008 masked growing inflation in other goods and services, a separate report from the Labor Department showed.

Core Prices

The consumer-price index decreased 0.2 percent. The so- called core measure, which excludes more volatile food and energy costs, climbed 0.3 percent for a second month, more than forecast and the biggest back-to-back gain in three years.

U.S. stock-index futures rose as Citigroup Inc.’s second- quarter profit beat analysts’ estimates. Futures on the Standard & Poor’s 500 index expiring in September rose 0.2 percent to 1,309.40 at 8:56 a.m. in New York.

The measure of New York-area manufacturing last contracted for two straight months in the period ended in June 2009, when the recession ended. Estimates in the Bloomberg survey of 48 economists ranged from zero to 15.

The headline index is based on a separate question and does not reflect changes in areas like orders and employment. For that reason some economists consider it a measure of sentiment.

The Empire State gauge of new orders dropped to minus 5.5 last month, the lowest since November, from minus 3.6 in June. A gauge of unfilled orders slumped to minus 12.2, the weakest reading this year. A measure of shipments rose to 2.2 from minus 8.

Employment Gauge

The employment measure dropped to 1.1 from 10.2. An index of prices paid fell to 43.3 from 56.1, while prices received declined to 5.6 from 11.2.

Factory executives in the New York Fed’s district were less optimistic about the future. The gauge measuring the outlook six months from now increased to 32.2 from 22.5.

Manufacturing makes up about 12 percent of the U.S. economy and about 6 percent of New York’s. U.S. factory payrolls rose by 6,000 workers in June, according to Labor Department data, while the nation’s unemployment rate rose to 9.2 percent.

“We are going to be around these numbers for some years,” Andrew Liveris, chief executive officer at Dow Chemical Co. (DOW) said in a telephone interview July 8 from the company’s headquarters in Midland, Michigan, after the jobs data were released. “The absence of a construction sector and a building sector is really hurting this economy,” he said.

Dow plans to add 6,000 jobs this decade, mainly in Michigan, Texas and Louisiana, Liveris said.

‘Selling Well’

Dow is “selling well” to overseas markets, he said. Smaller U.S. companies with a regional focus aren’t doing as well, Liveris said. The path of economic recovery is “jagged, somewhere between “anemic” and “robust,” said Liveris.

President Barack Obama last month appointed Liveris to co- chair the Advanced Manufacturing Partnership, which is tasked with increasing U.S. manufacturing competitiveness.

Economists monitor the New York and Philadelphia Fed factory reports for clues about the Institute for Supply Management figures on U.S. manufacturing during the month. The Philadelphia report is due July 21 and the national ISM report is due Aug. 1.

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

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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