New York Area Manufacturing Shrinks for Third Month as Inventories Decline

Manufacturing in the New York region unexpectedly contracted in August for a third straight month as orders dropped and managers became less optimistic about the future, signaling the industry that has led the economic recovery is at risk of stumbling.

The Federal Reserve Bank of New York’s so-called Empire State Index fell to minus 7.7 from minus 3.8 in July, a report showed today. The median forecast in a Bloomberg News survey called for an index of zero, the dividing line between expansion and contraction. The bank’s six-month outlook gauge dropped to the third-weakest level on record.

Weaker demand from consumers and businesses, coupled with slowing growth in emerging economies and Europe, means factories are ratcheting down production. The Fed, in its policy meeting last week, said growth this year had been “considerably slower” than forecast and announced it would keep its benchmark lending rate near zero at least though mid-2013 to spur growth.

“There are downside risks ahead for manufacturing particularly given that U.S. consumer spending is going to be weaker than a lot of people have been thinking, including the Fed,” said James Shugg, a senior economist at Westpac Banking Corp. in London.

Stocks rose, following a three-week drop for the Standard & Poor’s 500 Index, as more than $20 billion in corporate deals and valuations near the lowest level in two years offset signs the economy is slowing. The S&P 500 Index increased 0.9 percent to 1,189.19 at 11:26 a.m. in New York. Treasury securities were little changed.

Confidence Stagnates

Other reports today showed homebuilder confidence was little changed in August and global demand for U.S. financial assets weakened in June from a month earlier.

The National Association of Home Builders/Wells Fargo index of builder confidence was 15 for a second month, matching the median forecast of 48 economists surveyed by Bloomberg, data from the Washington-based group showed today. Readings below 50 mean more respondents said conditions were poor.

Net buying of long-term equities, notes and bonds totaled $3.7 billion during the month compared with net buying of $24.2 billion in May, according to statistics issued by the U.S. Treasury Department.

The New York Fed’s factory index covers New York, northern New Jersey and southern Connecticut. The measure last contracted for three straight months in the period ended in June 2009, when the economy was in a recession. Estimates in the Bloomberg survey of 55 economists ranged from minus 10 to 8.5.

Sentiment Gauge

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 fell to minus 7.8 from minus 5.5 last month. A gauge of unfilled orders dropped to minus 15.2 from minus 12.2. A measure of shipments advanced to 3 from 2.2.

The employment measure rose to 3.3 from 1.1. An index of prices paid dropped to 28.3 from 43.3 while prices received decreased to 2.2 from 5.6.

Factory executives in the New York Fed’s district were also less optimistic about the future. The gauge measuring the outlook six months from now plunged to 8.7, the lowest reading since February 2009, during the depths of the recession, from 32.2. It was the third-lowest reading since records began in 2001.

Outlook Sinks

The group’s order outlook six months from now fell to the second-lowest level on record. Only the reading in September 2001 following the terrorist attacks was weaker.

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 24,000 workers in July, according to Labor Department data, while the nation’s unemployment rate fell to 9.1 percent.

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 Aug. 18 and the national ISM report is due Sept. 1.

Cars and light trucks sold at a seasonally adjusted pace of 12.2 million in July, up from 11.4 million in June yet trailing the 12.5 million average pace through the first half, Autodata Corp. said last week. Deliveries at Detroit-based General Motors Corp. climbed 7.6 percent from the same month in 2010 to 214,915.

Losing ‘Momentum’

“Although the economy has clearly lost some momentum, we do believe that it will continue to recover, but more gradually than we had originally anticipated as we move through the second half of the year,” Don Johnson, GM’s vice president of U.S. sales, said on an Aug. 2 conference call.

Allentown, Pennsylvania-based Air Products & Chemicals Inc. (APD), a maker of industrial gas and related equipment, on July 22 reported a 15 percent gain in net income from continuing operations from a year earlier.

“We continued to see strong volume growth across a number of our businesses,” John McGlade, chairman and chief executive officer, said on a conference call. “Growth in the Asia Merchant business and more broadly in the energy and electronics markets was strong, while both the U.S. and Europe Merchant businesses were slower.”

To contact the reporters on this story: Bob Willis in Washington at bwillis@bloomberg.net; Alex Kowalski in Washington at akowalski13@bloomberg.net

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

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