A closely watched survey of business activity in the U.S. mid-Atlantic region (search) showed evidence of some slowing in the country's economic expansion on Thursday, but an index used to gauge future growth gave more hopeful signals.

The Philadelphia Federal Reserve's (search) business activity index came in at 13.2 for January, marking the 20th consecutive month factories in the highly industrialized region of the United States expanded output. But the index was down from 25.4 in December, indicating that the pace of activity slowed considerably from the prior month.

The January reading also was the lowest in 18 months, and far lower than the 26.4 median forecast by economists.

In another report released on Thursday, the Conference Board (search), a private think tank, said its leading indicators index rose in December for the second straight month after five consecutive declines.

The index rose 0.2 percent to 115.4, a bigger increase than the 0.1 percent forecast by economists.

Alan Ruskin, research director at 4Cast in New York, said the day's data gave a hint that U.S. economic growth may not be a strong as people had hoped.

"On the growth side, the Philly Fed number certainly seemed soft," said Ruskin. "I am encouraged by some improvement in the leading indicators. But that needs to be watched closely because we haven't felt the full effects of the prior five months of declines.

"We just might have kicked off the year on the soft side," he added.

Almost all of the subindexes within the Philadelphia Fed index fell. Among the exceptions were employment, which showed a small rise to 17.00 from 14.00, and prices paid, an inflation indicator. It rose to 66.1 from 53.8.

The new orders component, a pointer on future growth, fell for the fourth month, to 9.8 in January from 20.9 in December.

"The encouraging aspect of this report is the hiring activity, and we are monitoring the inflation news in this report, which is not particularly encouraging," said Parul Jain, deputy chief economist at Nomura Securities International in New York.

Gary Thayer, chief economist at A.G. Edwards and Sons in St. Louis, said the rise in the prices paid component was "a little discouraging."

"It appears that we're still seeing cost pressures for a lot of businesses," said Thayer. "But overall, the economy has been able to absorb those and it looks like manufacturing activity is still doing OK, but is not exceptionally strong."

The Philadelphia Fed survey is one of the first indicators of U.S. manufacturing every month and is often used to gauge the overall state of factories nationwide.

U.S. Treasury prices were mixed after the factory data, with longer-dated debt weighed down by profit-taking but short-term paper aided by the surprisingly soft reading. The dollar eased briefly.

The rise in the leading indicators index was only the second monthly increase after five months of declines.

Steven Wood, economist at Insight Economics in Danville, Calif., said the two-month rebound in the index was a positive sign.

"However, even if this month's increase were sustained, it still suggests only moderate economic growth over the next six to nine months," he said in a research note.

4Cast's Ruskin said there was little in the two reports that would sway the Federal Reserve from a policy of methodically raising interest rates to stem inflation pressures in the expanding economy.

"The Fed would need a couple of months or more of sluggish data to influence them," he said. "But if we did get a few months of data that suggested growth below 3 percent, rather than 3.5 to 4 percent, that could severely truncate the tightening cycle."

St. Louis Federal Reserve (search) President William Poole (search) said on Thursday that growth forecasts of 4 percent to 4.5 percent for 2005 were "pretty reasonable," echoing sentiments expressed by other Fed officials this month.