Philly Fed manufacturing index drops sharply in December

The downturn in manufacturing activity in the Philadelphia region worsened more than expected in December, according to the Philly Federal Reserve on Thursday.

The Manufacturing Business Outlook Survey found that the current general activity index dropped to -10.5 this month, from -5.9 in November.

This was the index's 17th reading below zero in the past 19 months and significantly below the -3.0 level expected by economists.

Some 26% of firms surveyed reported decreases in activity, up from 18% in November, and compared with just 15% reporting increases.

The new orders index dropped sharply to -25.6 from 1.3 in December, while the shipments index rose 7 points from last month but remained negative at -10.8. However, the employment index declined slightly but continued to suggest mostly steady levels of employment.

The drop in Philly manufacturing headline gauge follows a huge 23.6-point decline in the New York manufacturing index.

"The main factor holding back manufacturing activity is weak capital spending," explained economist Kieran Clancy from Pantheon Macroeconomics.

"The recent plunge in interest rates likely will boost capex plans over the next few months, but this will take time to translate into a meaningful increase in actual spending. In the meantime, manufacturing activity will continue to flatline, given the lack of any meaningful external boost."