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Worker Maria Robles sews clothes at the Karen Kane clothing company in Los Angeles, California June 30, 2011.


Factory activity in the U.S. mid-Atlantic region grew in October, snapping five months of contraction, although the pace of expansion was still modest as both new orders and employment contracted, a survey showed on Thursday.

The Philadelphia Federal Reserve Bank said its business activity index rose to 5.7 from minus 1.9 the month before. That topped economists' expectations for a gain to 1, according to a Reuters poll. Any reading above zero indicates expansion in the region's manufacturing.

The return to growth in the overall index, one of the earliest monthly reads on the health of the U.S. manufacturing sector, comes after nationwide manufacturing ended three months of contraction in September and as housing and employment data continue to show signs of improvement.

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But indications for manufacturing are still mixed, raising question marks over the sector. A gauge of manufacturing in New York state shrank for the third month in a row in October, though the pace of contraction eased.

"We need to see more manufacturing surveys over the next few weeks to gauge any new trend different than the rather lackluster activity seen in manufacturing over the past four months," Peter Boockvar, equity strategist and portfolio manager at Miller Tabak in New York, said in a note.

The employment component of the index continued to contract, falling to minus 10.7, its lowest since Sept. 2009. New orders, seen as a forward looking component of the index, fell to minus 0.6, its fifth contraction in six months after a slight expansion last month.

"It could be that some of the firms that had been hiring have stopped hiring, waiting for demand to pick up," Michael Trebing, senior economic analyst at the Federal Reserve Bank of Philadelphia, said during a conference call.

"Lots of comments about uncertainty: elections, fiscal clif, and also the international situation because lots of these firms are producing for exports," he said.

The S&P 500 remained marginally lower after the news, with investors largely focused on the unfolding third quarter corporate earnings season.

The Philadelphia Fed survey covers factories in eastern Pennsylvania, southern New Jersey and Delaware and is seen as one of the first monthly indicators of the health of U.S. manufacturing leading up to the national report by the Institute for Supply Management.

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