U.S. Economy: Leading Index Fell More Than Forecast (Update2)

By Courtney Schlisserman and Joe Richter


Nov. 21 (Bloomberg) -- The U.S. economy may continue to slow into 2008, according to a measure of its performance over the next three to six months.

The Conference Board's index of leading economic indicators fell 0.5 percent in October after a 0.1 percent increase that was smaller than previously estimated, the New York-based group said today. A separate report showed consumer confidence weakened this month.

The figures, coming a day after the Federal Reserve lowered its growth forecast for next year, add to concern that the credit collapse is causing consumers and businesses to cut spending. The deepening housing recession will constrain the expansion again this quarter, slicing growth to about 1 percent, from around 5 percent in the previous three months, economists predict.

``There is a definite pattern of weakening here,'' said Edward McKelvey, a senior economist at Goldman Sachs Group Inc. in New York, who correctly forecast the decline in the leading index. ``It's all consistent with deceleration in the economy and that includes some deceleration in the labor market.''

Economists forecast the Conference Board's index would decline 0.3 percent, after an initially reported 0.3 percent gain in September, according to the median of 60 estimates in a Bloomberg News survey. Projections ranged from no change to a 1 percent drop.

``The data are pointing to a continued slow economy,'' Ken Goldstein, a Conference Board economist, said in a statement. ``It might even slow a little more after the holidays.''

Hit to Retailers

Target Corp., the second-largest U.S. discount chain and Limited Brands Inc. reported lower-than-forecast earnings this week as consumers pull back on spending. Home-improvement chain Lowe's Cos. also cut its profit outlook, while department-store chain Kohl's Corp. warned last week it would be ``very conservative'' in sales planning for next year.

Treasury securities rallied before the reports as investors sought a haven amid the weakening outlook for growth. Yields on benchmark 10-year notes fell below 4 percent for the first time since 2005. The Standard & Poor's 500 stock index fell 15.02, or 1 percent, to 1,424.68 at 11:42 a.m. in New York.

Rising fuel costs and the housing slump spurred a drop in the Reuters/University of Michigan final sentiment index to 76.1 in November, the lowest level since October 2005, following Hurricane Katrina. The index was at 80.9 in October.

Government figures today also showed that initial claims for unemployment insurance held at a level that indicates a softening job market. The Labor Department said claims decreased by 11,000 to 330,000 in the week that ended Nov. 17, matching economists' forecasts.

Annual Drop

The leading economic indicator index is down at an annual pace of 1 percent over the last six months, short of the approximate 4 percent drop that Conference Board economists have said is required to signal recession.

Seven of the index's 10 components declined, led by the 6.6 percent slump in building permits that was reported by the Commerce Department yesterday. The drop subtracted 0.18 percentage point from the leading index.

Initial jobless claims averaged 327,500 in October, up from 313,100 the prior month, and subtracted 0.14 percentage point. A report today from the Labor Department showed initial claims last week dropped to 330,000 from a seven-month high of 341,000 the prior week.

A drop in the Reuters/University of Michigan's consumer expectations gauge last month cut 0.11 percentage point from the leading economic indicators. The gauge, which some economists consider a harbinger of future spending, dropped again this month, according to a report today.

Holiday Forecast

Rising energy prices, increasing unemployment and continued weakness in housing concern Americans and may lead to the weakest holiday sales season in five years, according a forecast by the National Retail Federation, a Washington-based trade group.

``Spending is going to slow because of rising gasoline prices and tighter credit conditions,'' said David Sloan, senior economist at 4Cast Inc. in New York, who correctly projected the LEI result.

J.C. Penney Co., Starbucks Inc. and FedEx Corp. are among companies that have recently lowered profit forecasts.

``We're going to have a mediocre holiday season as consumer spending is a bit hemmed by rising gasoline and falling home values,'' said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh.

Seven of the 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.

Money Supply

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

The economy is projected to grow at a 1.5 percent annual rate this quarter after expanding at a 3.9 percent pace in the previous three months, according to a Bloomberg News survey taken earlier this month.

Fed policy makers lowered their growth forecasts in October and worried about credit-market losses, according to the minutes of their Oct. 31 meeting issued yesterday. The decision to reduce the benchmark interest rate target by a quarter percentage-point was described as a ``close call.''

The records of the gathering were accompanied by estimates and language that highlighted risks to growth. Traders anticipate the central bank will be forced to trim borrowing costs again next month.

Cisco Orders

Cisco Systems Inc., the world's largest maker of networking equipment, said earlier this month that declining orders from automobile and financial companies are curbing growth.

``The U.S. economy, to most of my customers, felt like we were coming in a soft landing,'' John Chambers, chief executive officer of Cisco, said on a conference call Nov. 7. An ``air of conservatism'' is ``affecting their purchasing.''

The Conference Board's index of coincident indicators, a gauge of current economic activity, was unchanged in October after increasing 0.2 percent in September. The index tracks payrolls, incomes, sales and production.

The gauge of lagging indicators rose 0.3 percent after a 0.4 percent gain in September. The index measures business lending, length of unemployment, service prices and ratios of labor costs, inventories and consumer credit.