June 16 (Bloomberg) -- Manufacturing in the New York region shrank more than forecast in June as customers reduced orders because of the slowdown in consumer spending and business investment.
The Federal Reserve Bank of New York's general economic index dropped to minus 8.7 from minus 3.2 a month earlier, the bank said today. Readings less than zero signal contraction.
The biggest housing slump in a quarter-century and the weakest auto sales in 15 years are hurting U.S. factories and threatening to cause more job cuts. Today's figures reinforced concern the economy will experience a degree of stagflation, where growth slows and inflation accelerates.
``We are going to see a much more gradual rebound in the economy than we previously thought,'' said Ryan Sweet, an economist at Moody's Economy.com in West Chester, Pennsylvania. ``Tightening credit conditions and the housing recession are all weighing on the factory sector.''
The New York Fed began its Empire State gauge in 2001. It provides one of the month's earliest pictures of the state of manufacturing. The region's general economic index averaged 17.2 in 2007 and reached a record low of minus 22.2 in March. This month's survey was taken from June 2 through June 12.
Economists forecast the Empire State index would rise to minus 2 this month, according to the median of 51 projections in a Bloomberg News survey. Tomorrow, the Fed publishes its report for national industrial production in May. On June 19, the Fed's Philadelphia branch releases its own factory data.
`Further Declines'
``Unfortunately, further declines are likely in the months ahead,'' said Steven Wood, president of Insight Economics LLC in Danville, California. ``Demand was moribund even with robust exports.''
Treasuries initially extended gains after the report, surrendering them later. Yields on benchmark 10-year notes were at 4.24 percent at 12:45 p.m. in New York, from 4.26 percent at last week's close. The Standard & Poor's 500 Index fell 0.3 percent to 1,356.32.
The New York Fed initially issued two sets of Empire index data, each with different readings. The correct figures were later confirmed on its Web site.
Another report showed confidence among homebuilders unexpectedly dropped this month, signaling the housing slump may worsen. The National Association of Home Builders/Wells Fargo sentiment index fell to 18, matching a record low, from 19 in May, the Washington-based group said. Readings under 50 mean most respondents view conditions as poor.
Sales to `Erode'
``Housing still occupies a major place in this ongoing, rather unique and rather strange economic slowdown,'' David Seiders, chief economist at the builders' group, said on a conference call. ``I do expect the sales volume to erode somewhat further in the months ahead.''
The New York Fed's new orders index declined to minus 5.5 from minus 0.5, today's report showed. Shipments dropped to minus 6.5 from 4.6. A gauge of unfilled orders decreased to minus 10.5 from minus 4.4. The index of inventories improved to minus 2.3 from minus 6.5.
The report showed raw-material costs continue to hamper business. The index of prices paid eased to 66.3 from a record 69.6. The gauge of prices received increased to 26.7, the highest since January 27.4, from 15.2.
`Ominous Sign'
The increase in prices is ``an ominous sign if it proves to be general and particularly if it extends to the retail sector,'' economists at Goldman Sachs Group Inc. in New York, said in an e-mail to clients.
Eastman Kodak Co. said May 31 it is raising prices on film and paper by as much as 20 percent to cover higher costs for silver, aluminum, plastics and resin.
Ford Motor Co. has said U.S. light vehicle sales may drop to 14.7 million this year, which would be the lowest in 15 years. The auto industry affects companies from plastics manufacturers to electronics firms.
The measure of employment was 1.2 in June, from 1.1 in May.
Companies were more upbeat about their prospects. The index measuring the outlook for six months from now increased to 32.2, the highest this year, from 23.9 in May. Area factories were optimistic the slump in orders and sales wouldn't persist.
Fed Survey
Manufacturers in the New York region ``report that business activity remained sluggish in May, while cost pressures have been increasingly widespread,'' the Fed said last week in its regional economic survey, known as the Beige Book. Nationwide, economic growth was ``generally weak.''
The Beige Book is part of a package of analysis and data central bank policy makers will use as they decide the direction of interest rates at their meeting June 24-25. Fed officials cut the benchmark interest rate 2.25 percentage points over the first four months of this year and futures traders project no change at this month's meeting.
The Philadelphia Fed is scheduled to release its regional report on manufacturing on June 19. Economists forecast that measure would improve to minus 10 this month from minus 15.6 in May.
The jump in commodity prices is a boon to some companies. Pall Corp., the East Hills, New York-based maker of oil filters for refineries and drugmakers, said June 9 that profit may be higher than its previous forecast.
To contact the reporter on this story: Courtney Schlisserman in Washington at cschlisserma@bloomberg.net
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