Philly Fed Factory Activity Slumps Further in February

Contraction in U.S. Mid-Atlantic factory production accelerated in February as manufacturers pulled back in anticipation of an economic downturn, according to the Philadelphia Federal Reserve.

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The regional central bank said Thursday its business activity index stood at minus 24.0 this month, down from an already weak minus 20.9 in January, which had been its worst reading since the 2001 recession, and well below forecasts.

Economists polled by Reuters had forecast a reading of minus 11.0. Readings below zero represent contraction in the industrial sector.

The closely watched report from the Philly Fed comes as a separate gauge of future economic activity dropped for the fourth consecutive month in January, a business group said Thursday, suggesting the U.S. economy could weaken further in the near future.

Also Thursday, the Labor Department said the number of newly laid off workers filing claims for unemployment benefits fell last week, but the larger-than-expected drop was seen as only a temporary improvement. Analysts noted claims offices in California were closed for a day last week for a state holiday, giving laid off workers one less day to file claims.

Leading Indicators Decline

The Conference Board said its index of leading economic indicators fell 0.1 percent last month, after a revised 0.1 percent drop in December and a 0.4 decline in November.

The index is designed to forecast the direction of the nation's economy over the next three to six months. Persistent, pronounced declines over several months could signal a recession is in store.

With the decline, the leading index has fallen 2.0 percent over the last six months, the biggest drop since early 2001. Weakness among the components that make up the index has also been more widespread in recent months.

"What we're seeing is that it's very, very close to capitulation," said Brian Bethune, an economist with Global Insight.

The Conference Board report comes a day after the Federal Reserve released its updated forecast for slower economic growth, higher unemployment and higher inflation. The dismal outlook for the year was despite the central bank's aggressive interest rate cuts in January.

Jobless Claims Fall

On Thursday, the Labor Department reported that the number of jobless claims dropped by 9,000 last week to a total of 349,000.

While that was bigger than the decline that had been expected, analysts noted that claims offices in California, the largest state, were closed for one day last week for a state holiday, giving laid off workers one less day to file claims.

The four-week average for claims, which gives a better picture of labor market trends, rose to 360,500, which was the highest level since claims spiked in October 2005 in the aftermath of Hurricane Katrina.

Analysts said the rise in the four-week average was depicting a labor market that is coming under increasing strains because of the slowing economy.

The Federal Reserve released a revised economic forecast on Wednesday that slashed growth prospects for this year but still maintained that the country could avoid a recession.


However, many private economist believe the country has already entered a downturn that began this quarter and will last through the spring. They are forecasting that the overall economy, which skidded to growth at a barely discernible annual rate of 0.6 percent in the final three months of last year, will turn negative in the first and second quarter this year. The classic definition of a recession is two consecutive quarters of negative economic growth.

President Bush last week signed a $168 billion economic stimulus bill which is designed to provide rebate checks of $600 for individual and $1,200 for couples with the checks scheduled to begin arriving in mailboxes this spring as a way to give the economy a boost.

But even with the rebate checks, which Bush called a "booster shot" for the economy, analysts are forecasting a period of slower growth, reflecting the blows that have been dealt by a prolonged downturn in housing and a severe credit squeeze, which has made it harder for consumers and businesses to get loans.

The economy shed 17,000 jobs in January, the first monthly job loss in more than four years. Analysts believe that the unemployment rate, which currently stands at 4.9 percent, will rise to 6 percent before the current slowdown has run its course.

The performance of jobless claims for the week ending Feb. 9 was revised to show 10,000 more benefit applications during that week than previously reported, reflecting a sharp revision from data supplied by California.

For that week, 37 states and territories had increases in claims while 16 had declines.

California had the largest increase, a jump of 7,857 that was attributed to higher layoffs in trade, service and manufacturing industries. The biggest decline in claims occurred in Ohio, which saw a drop of 2,752.