Philly Fed: Manufacturing tumbles

(MoneyWatch) In a troubling sign for the economy U.S. manufacturers are reporting a significant drop in orders, even as wholesale prices are dropping.

Yesterday, the Federal Reserve reported that nationwide manufacturing output fell 0.4 percent nationwide in April, the largest drop in six months. The New York Fed reported its general economic index declined to minus 1.4 this month from 3.1 in April. Today, the Federal Reserve Bank of Philadelphia reported an even sharper drop in its region, going to minus 5.2 from 1.3 the prior month. Readings less than zero indicate a contraction.

Analysts were shocked by the numbers. In a note to investors, Ian Shepherdson of Pantheon Macroeconomic Advisors called the national numbers "awful." However, he noted that the decline is "very unlikely to continue -- the ISM manufacturing survey points to small increases in output. But for now it looks terrible, and it is broad-based."

Economist Cullen Roche, also looking at the national figures, said he too was taken aback by the numbers. 

"Total industry production was very weak at -0.5 percent. The manufacturing component registered a -0.4 percent decline," he wrote on his blog Pragmatic Capitalism. "Analysts had been expecting a 0.1 percent rise. Durable goods were particularly weak at -0.6 percent. Total capacity utilization declined to 77.8 versus expectations of 78.3. In other words, this report was kind of a disaster."

The drop in output is a result of less inventory building by companies and diminishing demand from abroad -- suggesting the U.S. is not as immune from world economic woes as some have claimed.

There could be good news ahead. In April, retail sales rose 0.1 percent. It is possible this could be an indicator of further increases which would give factories a boost.

But it is also worth noting that U.S. wholesale prices posted their largest drop in three years in April, mostly due to falling gas prices. This means retail sales increased relatively little in a month when prices were decreasing and consumers had more money to spend because less of it was going to buy gas for their cars.