Philly Fed: Mid-Atlantic Factory Activity Slows, But Outlook Bright

Factories in the U.S. mid-Atlantic region in January ran at their slowest pace since June, but the outlook appeared bright as new orders and jobs flourished while inflation eased, a report on Thursday showed.

The Philadelphia Federal Reserve Bank said its business activity index slid to 3.3 from a downwardly revised 10.9 in December, well short of Wall Street's median forecast of a rise to 12.6. A reading above zero indicates growth.

January's result was the weakest since 0.0 in June 2005.

But all of the major components of the index painted a much brighter picture of manufacturing right now, as new orders rose to their highest since October and prices paid, a key gauge of inflation in the sector, fell to pre-Hurricane-Katrina levels.

"The Philadelphia Fed business outlook index is still above zero in January, pointing to expansion, but the expansion is not quite as broad," said Gary Thayer, chief economist at A.G. Edwards and Sons in St. Louis.

Benchmark Treasury debt prices recouped some of their earlier losses to yield 4.38 percent, up 4.0 basis points on the day but off an intra-day yield high of 4.39 percent.

The dollar slipped against the euro after the data and U.S. blue chip stocks stayed in positive territory.

"The decline in the prices paid component is good news. It looks as if we're seeing some moderation in pricing pressures, but not a significant drop," Thayer added.

The measure of prices paid by manufacturers eased to 44.9 from 47.1 the month before, the lowest since the August reading of 26.9 before Katrina shuttered much U.S. Gulf Coast oil refining capacity and sent crude prices to record highs.

The new orders index, a gauge of future growth, rose to 11.1 in January from 5.8 in December, while the jobs component rose to 11.7 from 7.9.

Executives were more cautious, however, about the outlook for the coming months, and many toned down their expectations for both investment and hiring.

The Philly Fed said overall expectations for the next six months had diminished somewhat in January, although they remained optimistic overall. The index for future activity fell to 28.7 from a revised reading of 33.4 in December.

The regional 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.

Spending on new plants and equipment could tail off in the next six to 12 months, according to the survey, which showed a higher percentage of respondents in January expect a fall in capital expenditure than in June last year.

A special survey question on spending plans showed 39.2 percent of respondents expected to increase spending in the next six to 12 months in January compared with 39.8 pct in June 2005, while those expecting to cut spending rose to 15.2 pct in January, from 13.3 percent in June last year.