Empire State Manufacturing Slowed in July

Factory activity across New York state leveled off in July after climbing a month earlier, highlighting the modest and uneven nature of the recovery in the U.S. manufacturing sector.

The Empire State's business conditions index declined to 0.6 this month from 6.0 in June. The index has been seesawing around the flat line, with separates expansion from contraction, in recent months. In May, the gauge registered at -9 after back-to-back gains.

Economists surveyed by The Wall Street Journal had expected the index to fall slightly to 4.5.

The Empire report is one of several factory surveys conducted by regional Fed banks, looked to by economists and investors for clues about the health of the national manufacturing sector, which accounts for about 10% of American jobs and output. The New York state report is the first in the July batch.

This month's result underscores the shaky recovery happening across the nation's producers. The strong U.S. dollar and collapsing energy prices have pulled down activity for months, as exports became less competitive and energy-exposed customers halted capital spending. However, as those headwinds eased demand has resurfaced. Still, the dollar remains a challenge given Brexit and expectations that Federal Reserve rate increases are in the pipeline, and while the price of oil has stabilized it is still below levels needed to spur meaningful investment.

Across New York, demand slipped back into negative territory this month and shipments, in turn, dropped. Inventories remain negative, suggesting firms continue to draw from existing stocks and aren't replenishing.

New York factory owners, meanwhile, cut payrolls this month and existing workers logged fewer hours. Despite modestly better manufacturing conditions across the country in recent months, firm owners have remained hesitant to hire. Respondents to the New York Fed's survey said this month that they expect to keep payrolls steady over the next six months, a signal that they are cautious in their overall outlook.

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