Manufacturing in the Philadelphia Area Unexpectedly Shrinks

Manufacturing in the Philadelphia region unexpectedly contracted in January, an indication companies are becoming more concerned about across-the-board U.S. government spending cuts that could slow growth.

The Federal Reserve Bank of Philadelphia’s general economic index dropped to minus 5.8 from 4.6 in December. Readings lower than zero signal contraction in the area covering eastern Pennsylvania, southern New Jersey and Delaware. The median forecast of 58 economists surveyed by Bloomberg was 5.6. Estimates ranged from minus 3 to 10.

The report follows New York Fed data released earlier this week showing factory activity shrank for a sixth straight month and raises the risk manufacturing, once a pillar of the recovery, will again weaken in early 2013. Looming changes in federal spending and stagnant prices give companies little reason to expand inventories, which may hurt manufacturers.

“Manufacturing is going to be touch-and-go over the next few months until we get some fiscal clarity,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, the only economist to project the index would turn negative. The New York and Philadelphia surveys are “a sign that the fiscal deal struck on new year’s was a good first step, but it didn’t reduce the uncertainty.”

Other reports today showed housing starts surged more than forecast in December, fewer Americans than projected applied for jobless benefits last week and Americans’ economic outlook deteriorated in January to a three-month low as paychecks began reflecting higher taxes.

Shares Climb

Stocks climbed the better-than-projected housing and jobless claims data. The Standard & Poor’s 500 Index rose 0.4 percent to 1,479.05 at 10:33 a.m. in New York.

The Philadelphia Fed’s new orders measure dropped to minus 4.3 from 4.9 the prior month while the shipments gauge declined to 0.4 from 14.7. The inventory index improved to minus 6.5 from minus 7.8.

The employment index decreased to minus 5.2 from minus 0.2.

The index of prices paid dropped to 14.7 from 23.5 the prior month, while a gauge of prices received decreased to minus 1.1 from 12.4.

The report runs counter to data yesterday that showed manufacturing improved at the national level in December. Industrial production, which measures output at factories, mines and utilities, climbed in December for a second month, rising 0.3 percent after a 1 percent November gain, the Federal Reserve reported.

December Production

Factory output alone advanced 0.8 percent after increasing 1.3 percent in November, in part reflecting a rebound from superstorm Sandy which slammed the East Coast in late October.

Economists monitor the Fed’s regional surveys for clues about the Institute for Supply Management national figures on manufacturing. The next ISM report is due Feb. 1. Manufacturing makes up about 12 percent of the economy.

The automobile industry remains a source of growth. Cars and light trucks sold at a 15.3 million annual pace in December after a 15.5 million rate in November, the best two months since early 2008, according to Ward’s Automotive Group.

The average age of the U.S. fleet is 11 years, a record high, and borrowing costs are low, said James Lentz, president and chief executive officer of Toyota (TM) Motor Sales USA Inc. in Torrance, California.

Auto Demand

“We expect growth, especially in hybrids, in small trucks and in the retail sales business, which has us poised for another good year,” Lentz said at a Jan. 16 conference. Younger buyers are returning to the market and there is pent-up demand.

“All of this is good news for the auto industry, and that’s why at Toyota we’re so optimistic about 2013, but it’s still cautious optimism, because we all know, too well, that anything can upset a forecast, from exchange rates to strength or weaknesses in global economies, even Mother Nature with earthquakes, tsunamis, tornadoes and hurricanes,” Lentz said. “‘We’re energized and we’re looking forward to another good year.”

To contact the reporter on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net

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

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