Two reports signal an economy on thin ice

Manufacturing activity in the Philadelphia area contracted in March for the fourth consecutive month, and a separate set of economic indicators for future activity from the Conference Board weakened for the fifth month in a row.

Both of yesterday's reports - one regional and one national - reinforced the perception of an economy skating on thin ice despite repeated actions by the Federal Reserve to cut interest rates and calm turmoil in the credit markets.

The Philadelphia Federal Reserve Bank's manufacturing index for March was -17.4, compared with -24 in February. A reading of zero indicates flat growth, while negative readings mean declining activity.

The Philadelphia Fed survey's negative reading was slightly better than anticipated, and its indicators for the future rebounded from their deeper lows of last month.

Wall Street, which watches the survey closely, cheered the rebound and sent stock prices higher. The Dow Jones industrial average, Standard & Poor's 500 and Nasdaq all rose more than 2 percent.

The survey was far from good news, though. The general sentiment by manufacturing executives was cautious about hiring, said Philadelphia Fed senior economic analyst Mike Trebing. Companies said they were cutting back on employee working hours, according to the survey.

Manufacturers also were concerned about price increases for raw materials.

Economic weaknesses varied by industry, Trebing said, with export-driven companies seeing brighter times than construction businesses.

Meanwhile, the Conference Board said its index of future economic activity dropped in February, suggesting that the weakening U.S economy could be slipping into - or already in - a recession.

The index of leading economic indicators fell 0.3 percent last month to 135.0 after dipping a revised 0.4 percent in January. The February level matched the decline expected by analysts surveyed by Thomson Financial/IFR.

The index is designed to forecast where the nation's economy is headed in the next three to six months.

Many economists believe rising gas prices, falling home prices and tightening credit markets have begun squeezing consumers and businesses, forcing them to cut spending. As a result, the U.S. economy may have stopped growing in the current quarter and could continue faltering in the second quarter. That would meet a technical definition of a recession - two consecutive quarters of negative growth.

Ken Goldstein, labor economist at the Conference Board, said in a statement accompanying the report that economic signals "are flashing yellow."

Scott Brown, chief economist with Raymond James & Associates in St. Petersburg, Fla., said he expected that economic growth could be "close to zero, maybe negative" in the first half of the year, but that output likely would improve in the second half.