U.S. Economy: Leading Indicators Down

U.S. Economy: Leading Indicators Dropped in November (Update1)

By Bob Willis

Dec. 20 (Bloomberg) --

 

The U.S. economy is at greater risk of faltering next year, according to an index of leading indicators, and a gauge of manufacturing in the Philadelphia region fell the most since the last recession.

 

The Conference Board's leading-indicator measure dropped 0.4 percent, more than forecast, to the lowest level in more than two years, the New York-based research group said today. The Philadelphia Federal Reserve said its factory index declined to minus 5.7, the weakest reading since December 2006.

 

The deepest housing slump in 16 years is likely to worsen as foreclosures mount and banks restrict lending, economists said. Declining property values, rising energy costs and a softening labor market may also hurt consumer spending, which accounts for more than two-thirds of gross domestic product.

 

``It's certainly pointing to a slowdown,'' said Roger Kubarych, chief U.S. economist at Unicredit Global Research in New York. ``The fourth quarter is going to be much weaker than what we've been seeing.''

 

A separate report from the Labor Department showed the number of Americans filing for jobless benefits rose a greater- than-anticipated 12,000 to 346,000 last week. The Commerce Department said the economy expanded 4.9 percent last quarter, unchanged from the previous estimate published last month.

 

Economists' Forecasts

Economists forecast the Conference Board's index would decline 0.3 percent following a 0.5 percent drop the prior month, according to the median of estimates in a Bloomberg News survey. The measure, which signals the likely performance of the economy over the next three to six months, dropped to 136.3, the lowest since September 2005.

 

The drop in the Philadelphia Fed's gauge coincided with gains in some of the survey's other indexes. The headline reading is based on a separate question, not always reflecting underlying trends. Measures of orders and sales rose, while inventories and employment fell, the report showed.

 

FedEx Corp., the second-largest U.S. package-delivery company, today said quarterly profit fell as fuel costs rose and demand for freight shipments slowed. The Memphis, Tennessee- based company said its third-quarter earnings would be lower than a year earlier and cut its capital-spending forecast.

 

``We see challenging near-term economic trends,'' Chief Executive Officer Fred Smith said in the statement.

Rite Aid Corp., the third-largest U.S. drugstore chain, posted a wider quarterly loss than analysts estimated and reduced its full-year forecasts for the second time in three months today. Sales of non-pharmacy goods such as snacks and health and beauty products fell 0.4 percent.

 

Sales Forecast

The National Retail Federation in Washington has forecast holiday sales this year will show the smallest gain since 2002.

 

The leading index is down at an annual pace of 2.3 percent over the last six months, short of the approximate 4 percent to 4.5 percent drop that Conference Board economists say signals recession.

 

``I still think we have a good chance of avoiding recession although we are in store for a couple of quarters of slower growth,'' said Michael Moran, chief economist at Daiwa Securities America Inc. in New York.

 

Former Treasury Secretary Lawrence Summers said yesterday it's ``quite likely'' a contraction will develop next year, while former Federal Reserve Chairman Allan Greenspan has given it about even odds.

 

Slower Growth

The economy is projected to grow at a 1 percent annual rate this quarter and at a 1.5 percent pace in the first three months of 2008, according to a Bloomberg News survey taken earlier this month. The last recession was in 2001, when the economy grew 0.8 percent.

 

The slowdown is all the more pronounced because of the surge in growth last quarter. The world's largest economy grew at a 4.9 percent annual pace from July through September, the most in four years, the Commerce Department's final estimate showed today.

 

Declines in stock prices, the money supply, consumer sentiment and an increase in firings pushed the leading index down, the Conference Board said. Gains in the factory workweek, orders for capital equipment and slower supplier deliveries limited the drop.

 

The Standard and Poor's 500 Index fell 5 percent on average in November to 1463.39 from the prior month, as mounting defaults on subprime mortgages forced banks to write off losses, leading to spreading declines in financial markets.

 

An average 336,400 workers a week filed first-time claims for jobless benefits in November, up from 327,500 a month earlier.

 

Consumer Headwinds

The softening job market combined with declining home values and rising fuel costs may contribute to a slackening in spending during the holidays.

 

``It looks as though consumer spending is going to slow considerably from the third quarter,'' said Paul Kasriel, chief economist at the Northern Trust Company in Chicago. ``I really do think the odds are better than 50 percent that we will have a recession.''

 

Seven of the 10 components of the leading economic indicators index are known before the report: initial jobless claims, consumer expectations, building permits, supplier deliveries, the yield curve, stock prices and factory hours.

 

The Conference Board estimates money supply adjusted for inflation, new orders for consumer goods and orders for non- defense capital goods.

 

The Conference Board's index of coincident indicators, a gauge of current economic activity, rose 0.2 percent in November after falling 0.1 percent in October. The index tracks payrolls, incomes, sales and production. Combined with gross domestic product, these are the figures tracked by the National Bureau of Economic Research to determine when recessions start and end.

 

The gauge of lagging indicators also increased 0.2 percent after rising 0.3 percent in October. The index measures business lending, length of unemployment, service prices and ratios of labor costs, inventories and consumer credit.

 

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