By Shobhana Chandra Oct. 16 (Bloomberg) -- Manufacturing in the Philadelphia region shrank in October at the fastest pace in almost two decades, a sign the credit crunch is hurting producers. The Federal Reserve Bank of Philadelphia's general economic index plunged to minus 37.5 this, the lowest reading since October 1990, month from 3.8 the prior month, the bank said today. Negative readings signal contraction. The index averaged 5.1 last year. The decline signals manufacturing isn't recovering after a separate report showed industrial output dropped in September by the most in almost 34 years. More reductions in production are likely as job losses and tougher lending rules hurt sales. ``We can expect big declines in orders and production,'' Guy Lebas, chief economist at Janney Montgomery Scott LLC in Philadelphia, said before the report. ``We're headed for a fairly significant recession. Exports had been a big support for manufacturing but that leg is no longer available to stand on.'' Economists expected the Philadelphia index to fall to minus 10, according to the median of 54 forecasts in a Bloomberg News survey. Estimates ranged from 5 to minus 25. Production at factories, mines and utilities dropped 2.8 percent in September, exceeding forecasts and following a revised 1 percent decrease in August, the Fed said today. Last month's Gulf Coast hurricanes accounted for 2.25 percentage points of the decline and a strike at Boeing Co. subtracted another half point. The decline in output was the biggest drop since December 1974. Orders Slump The Philadelphia Fed's index of new orders slumped to minus 30.5, the lowest level since August 1980, and the shipments index decreased to minus 18.8 from 2.6. The gauge of prices paid declined to 7.2, the lowest level since July 2003, after 31.5 the prior month, indicating that prices rose at a slower pace. An index of prices received was 5.3, down from 15.5. The employment index was minus 18 after being little-changed in September. The headline index is a separate question unrelated to the individual measures and some economists consider it a gauge of business sentiment. Expectations for the next six months fell to minus 4.2 from 30.8, today's report showed. The New York Fed yesterday reported its Empire index of manufacturing sank in October to the lowest level since records began in 2001. The regional surveys provide early clues to the health of manufacturing nationwide, which accounts for about 12 percent of the economy. To contact the reporter on this story: Shobhana Chandra in Washington schandra1@bloomberg.net

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