Mid-Atlantic Manufacturing Activity Remains in Contraction

Manufacturing activity across the mid-Atlantic continued to contract at the start of the year, as producers remain crimped by adverse exchange rates, slower global growth and reduced capital spending, though conditions improved from the three-year low notched in December.

The Federal Reserve Bank of Philadelphia said its index of general business activity covering the regional factory sector rose to -3.5 in January from a downwardly revised -10.2 last month. After revisions, the index has reflected five straight months of contraction.

Economists expected the index to edge down to -6.0.

A rebound in shipments at the start of the year pulled the gauge higher. A subindex measuring shipments jumped 12 points and into positive territory for the first time in four months; new orders also improved, though the orders index remained in contractionary territory. Employment across the sector turned lower, falling back below the flat line, as producers signaled they would reduce hiring in the coming months.

The report out of the Philadelphia region follows a similar survey released last week by the New York Fed, which showed manufacturing conditions across New York deteriorated at the quickest pace since the recession in 2009. Traders and economists use the Fed surveys, five in all, as clues ahead of a carefully-watched gauge of national production. The Institute for Supply Management will next release that report on Feb. 1.

A sharp pullback in capital spending across the oil patch has hit the country's manufacturing segment, and the rising U.S. dollar has pressured demand as it makes domestic goods more expensive abroad. At the same time, economic weakness outside of the U.S.--especially in China, where imports are down sharply--has added to the sector's troubles.

While conditions improved modestly across the Philadelphia Fed district, which also includes New Jersey and Delaware, manufacturers turned even more pessimistic about their future prospects. The six-month outlook gauge dropped to 19.1 from 24.1 in December, marking the lowest degree of confidence since November 2012, as manufactures predicted drop-offs in new orders and shipments.

The January survey included a special question on impacts of sharply lower energy prices. A large share of firms--about a third--reported negative impacts from decreased demand from energy-producing customers, the report said.

Write to Lisa Beilfuss at lisa.beilfuss@wsj.com