[Benjamin]

Sep 21, 2006

Manufacturing activity in the Philadelphia region fell in September, the first monthly decline since April 2003 , led by a drop in new orders and shipments, according to the Federal Reserve Bank of Philadelphia on Thursday.
The Philly Fed index fell to -0.4 from 18.5 in August.

The details in the release suggest no growth in manufacturing in the region, the Philly Fed said.
The drop in the index -- the biggest since January 2001 -- was much larger than anticipated. Economists had expected the index to slip to 14.3.

There was a sharp reaction to the data in financial markets. The stock market fell sharply, while Treasury bond prices rose and yields declined.

Readings below zero in the diffusion index indicate contraction. The Philly Fed index slipped to 6.0 in July, but had bounced back in August.

The Philly Fed index, one of the first indicators released for September, is closely watched by economists and traders for clues it might shed about the Institute for Supply Management's national manufacturing sector. Economists expect the restructuring of the U.S. auto industry to push results for the ISM survey down in coming months.

But some economists said the correlations between the regional surveys and the ISM seem to be weakening this year.
Action Economics said the plunge in the Philly Fed index would roughly translate into a 49.9% reading in the September ISM factory index. Readings under 50% indicate contraction in the factory index. This would be the first reading below 50 since April 2003.

Economists at Bear Stearns said if the weakness in the Philadelphia-area manufacturing is corroborated in other indicators for September, then they would reconsider their view that Federal Reserve policymakers would hike rates one more time this year. But they stressed that they still considered this an unlikely event.

In September, the new orders index dropped to -1.3 from 15.7 in the previous month. This was the sharpest drop since Hurricane Katrina. The shipments index fell to -6.8 from 22.3, the sharpest decline since January 2001.
On the other hand, the employment index rose slightly to 10.7 from 8.2.

Mixed readings on inflation
The Philly Fed also reported that its prices paid index decreased to 38.1 from 45.3, but the prices received index rose to 21.6 from 17.1.

In addition, the region's manufacturers were much more pessimistic about the outlook. The index for future activity fell to its lowest level in six years.

In other reports released Thursday, the Labor Department said weekly jobless claims rose 7,000 to 318,000.

The Conference Board reported that its index of leading economic indicators fell 0.2% in August, the fourth decline in the past five months.