Philly Fed factory activity index contracts in Aug

NEW YORK Thu Aug 19, 2010 10:43am EDT

NEW YORK (Reuters) - Factory activity in the U.S. Mid-Atlantic region unexpectedly contracted in August to its lowest level in more than a year, a survey showed on Thursday, heightening worries over the sustainability of the economic recovery.

U.S. stocks extended declines following the report, while prices of U.S. Treasury debt -- considered a safe-haven financial investment -- turned positive and the dollar fell against the yen.

The Philadelphia Federal Reserve Bank said its business activity index fell to minus 7.7 in August from July's plus 5.1. Any reading below zero indicates a shrinking in the region's manufacturing.

The August reading was the lowest and also the first contraction since July 2009, when the economy was recovering from the credit crisis.

"We see data like this and it kind of confirms the bottom end of the scenario and it's going to be pretty tough all over right now for commodities, equities," said Dan Cook, senior market analyst at IG Markets in Chicago.

Economists had expected a reading of 7.0, based on the results of a Reuters poll, which ranged from minus 6.0 to plus 10.0.

The report was not the only gloomy data the markets had to contend with on Thursday. New claims for U.S. unemployment benefits unexpectedly climbed to a nine-month high last week, while a key gauge of the U.S. economy's prospects was only slightly higher in July, pointing to a slow expansion through the end of the year.

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, which is due next on September 1.

(Additional reporting by Chuck Mikolajczak, Editing by Chizu Nomiyama)

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