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Manufacturing in the Philadelphia region shrank less than anticipated in December, rebounding from an 18-year low as a slump in new orders slowed.

The Federal Reserve Bank of Philadelphia’s general economic index was minus 32.9 this month, the 11th negative reading this year, after minus 39.3 in November, the bank said today. Negative numbers signal contraction and the index averaged 5.1 last year.

Factories are retrenching as consumer spending slows and international demand weakens in the face of the global credit crisis. Manufacturing production was down 7.3 percent in the year ended November, the biggest drop since 1980, according to Fed data.

“Manufacturing is in a serious recession right now,” James O’Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut, said before the report. “A lot more weakness, in the next couple of months at least, looks inevitable.”

Economists forecast the index would fall to minus 40.5, according to the median of 53 projections in a Bloomberg News survey. Estimates ranged from minus 35 to minus 47.9.

The Philadelphia Fed’s employment index was minus 28.7, the lowest reading since 1982, compared with minus 25.2 in November, the report showed.

New Orders

The gauge of new orders gained to minus 25.2 in December from minus 31.4 a month earlier. The shipments index weakened to minus 28.7 from minus 18.8.

The prices paid index declined to minus 33.2, after minus 30.7 in November. An index of prices received was also lower, sinking to minus 37.8 from minus 15.5.

The headline index is a separate question unrelated to the individual measures and some economists consider it a gauge of business sentiment.

Expectations for the next six months fell to minus 14.5 from minus 10.4, today’s report showed.

An earlier report today showed the number of Americans filing first-time claims for unemployment benefits held near a 26-year high, signaling the labor market is deteriorating as the economy heads into a second year of a recession.

Initial jobless claims dropped by 21,000 to 554,000 in the week that ended Dec. 13, from a revised 575,000 the prior week that was the highest since 1982, the Labor Department said in Washington. The number of people staying on benefit rolls also slipped from an almost three-decade high faxless pay day loans.

Fed’s Response

The Fed on Dec. 16 cut its target federal funds rate to a range of zero percent to 0.25 percent and said it will do whatever is necessary to ease the economic recession.

“The committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time,” the Federal Open Market Committee said in a statement.

Earlier this week, the New York Fed said its gauge of business in that region dropped in December to the lowest level since records began in 2001.

The auto industry is among manufacturers that are being the worst hit by the economic downturn.

General Motors Corp., Chrysler LLC and other automakers are cutting back production, deepening the economic recession, as U.S. sales have dropped to the lowest level in 26 years. GM and Chrysler are on the brink of bankruptcy, awaiting government assistance to pay off debts.

Plant Closings

Chrysler LLC, the third-largest U.S. automaker, said Dec. 17 it will close all 30 of its plants for at least a month at the end of shifts on Dec. 19. The earliest plants will come back on line is Jan. 19, the company said in a statement.

Slowing international demand is also adding to factories’ woes. U.S. exports dropped for a third straight month in October, reaching the lowest level in seven months, the Commerce Department said last week.

“Export orders practically dropped off the board overnight” after “it came to light that the world’s industrial economies were having troubles and major trading partners slipped into recession” beginning about three months ago Ellen Zentner, a senior economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said in an interview with Bloomberg Television.

U.S. Steel Corp., the largest U.S.-based steelmaker by 2007 sales, said Dec. 2 it will cut output at three facilities because of a slump in demand. The idling leaves about 3,5000 workers temporarily laid off and follows an announcement last month by the Pittsburgh-based company that it was eliminating 677 jobs in North America amid a “dramatic downturn” in the economy.

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