U.S. Economy: Philadelphia Factory Index Declines (Update2)

By Bob Willis and Shobhana Chandra

Feb. 21 (Bloomberg) – The U.S. moved closer to a recession as manufacturing in the Philadelphia area shrank the most in seven years, while a measure of the economy’s future performance declined for a fourth month.

The Federal Reserve Bank of Philadelphia’s general economic index fell more than forecast this month to minus 24, showing the margin by which more firms reported a decrease in activity instead of an increase. That was the lowest figure since February 2001, weeks before the last downturn began. The Conference Board’s index of leading indicators dropped 0.1 percent in January, matching December’s decline.

Treasury notes rallied and the dollar weakened after the reports as traders anticipated the Fed will need to keep reducing interest rates. Stocks reversed early gains, and the Standard & Poor’s 500 Index closed down 17.50 points, or 1.3 percent, at 1342.53.

The economy is shrinking and business sentiment is as bad as it can be,'' said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. We’re very close to a recession.‘’

A two-year housing slump that has caused the first nationwide decline in prices since the Great Depression, coupled with higher borrowing costs for companies and households, has pushed the economy to the brink of a recession. The Fed, after cutting rates in January at the fastest pace since 1990, has said it is ready to move in a ``timely’’ manner to help growth.

Recession Committee

Even as data indicate the economy is deteriorating, two members of the panel that dates U.S. economic cycles said it’s too early to say a recession has begun.

``Notwithstanding the darkening clouds, we are still far from the point where the committee would act,‘’ said Robert Hall, an economist at Stanford University who leads the National Bureau of Economic Research’s Business Cycle Dating Committee.

Hall said committee members have had some informal discussions via e-mail since January. Victor Zarnowitz, another panel member, said it’s ``impossible’’ to know yet whether a recession has begun.

The Philadelphia Fed report provides one of the month’s earliest clues to the state of manufacturing nationwide. Similar data from the New York Fed released last week showed manufacturing contracted in the New York region for the first time in almost three years.

Economists’ Forecasts

Economists had forecast the Philadelphia manufacturing index would rise to minus 10.0, according to the median of 54 estimates in a Bloomberg News survey. Eighty-five companies responded to this month’s survey, which was taken from Feb. 6 to Feb. 18, said Philadelphia Fed spokeswoman Marilyn Wimp.

Last month’s drop in the Conference Board’s index brings the decline for the last six months to 2 percent, which the Conference Board says can be one of the ``reasonable criteria for a recession warning.‘’

Four of the 10 indicators in the report had a negative effect on the index, led by falling stock prices.

Consumer and business spending may slow as borrowing costs increase, even after the Fed’s rate cuts.

Average 30-year fixed rates on mortgages in excess of $417,000 have jumped to 6.76 percent from 6.46 percent a month ago, according to data compiled by

The extra yield investors demand to buy investment-grade U.S. corporate bonds instead of Treasury securities rose to 2.40 percentage points yesterday from 2.11 percentage points at the start of January, Merrill Lynch & Co. data show.

New Orders

The Philadelphia Fed’s measure of new orders rose to minus 10.9 from minus 15.2 the prior month, and a measure of shipments fell to minus 12.2 from minus 2.3 the prior month.

A gauge of unfilled orders dropped to minus 10.9 from minus 6.2, while the index of inventories declined to minus 13 from minus 11.7 the prior month.

The employment index gained to 2.5 from minus 1.5 a month earlier, the Philadelphia Fed said. An index of prices paid dropped to 46.6 from 49.8, while a gauge of prices received weakened to 24.3 from 32.

The biggest drag to the leading indicators measure came from the Standard & Poor’s 500 index, which averaged 1,379 in January, down from 1,479 the prior month. The S&P 500 has fallen three consecutive months, the longest losing streak since 2003.

Building permits, a sign of future construction, also subtracted from leading indicators. Permits fell 3 percent to a 1.048 million annual rate in January, the Commerce Department reported yesterday.

`Low’ Rates

Fed policy makers said ``relatively low’’ interest rates may be needed for some time as they cut their growth forecast and voted for the fastest easing of monetary policy in two decades, according to minutes of the Fed’s January conference calls and meeting released yesterday.

The Labor Department reported today that the number of Americans remaining on unemployment benefit rolls climbed to the highest since October 2005 as faltering economic growth prompted companies to cut payrolls.

The number of people continuing to collect benefits rose to 2.784 million in the week ended Feb. 9, from 2.736 million a week earlier, the Labor Department said today in Washington. First-time jobless claims decreased by 9,000 to 349,000 in the week ended Feb. 16, from a revised 358,000 a week earlier.

Americans are becoming cautious about spending. Best Buy Co., the largest U.S. consumer-electronics chain, on Feb. 15 cut its full-year profit forecast on lower sales of digital cameras, video games and home theaters.

``Soft domestic customer traffic in January, coupled with our near-term outlook, now indicate that our fourth-quarter revenue will fall short of our planned targets,‘’ Chief Executive Officer Brad Anderson said in a statement.