U.S. Leading Economic Indicators Index Fell 0.5% in May
*recession... anyone?
U.S. Leading Economic Indicators Index Fell 0.5% in May
June 20 (Bloomberg) -- The index of leading economic indicators fell for the fourth month in five, pulled down by a drop in bond yields that is sparking a debate among economists over what it means for growth.
The Conference Board's index declined 0.5 percent after no change in April. The decline in long-term bond yields as short- term rates rise, a so-called flattening of the yield curve, was the biggest contributor to the decline. Some economists said this shift in yields no longer signals a softening economy, as it has in the past.
``We still feel this index is flashing one of its false signals, especially with the yield-curve component leading the pack to the down side,' David Resler, chief economist at Nomura Securities International Inc. in New York, said before the report.
Other economists, including David Rosenberg of Merrill Lynch & Co. in New York, said the decline in long-term bond yields is sending the right message.
``The bond market is giving you a signal early, as it did in 2000,' Rosenberg, who is Merrill's chief economist for North America, said last week. ``It is forecasting slower growth.'
The Conference Board index tries to project the likely performance of the economy over the next three-to-six months. It was forecast to decline 0.3 percent, the median projection of 42 economists in a Bloomberg News survey, from a previously reported 0.2 percent fall in April. Estimates ranged from a rise of 0.3 percent to a decline of 0.4 percent.
Nine of the 10 indicators that make up the Conference Board's index contributed to the decrease in May.
Consumer Sentiment
The University of Michigan's measure of consumer sentiment fell in May to 86.9 from 87.7 in April and subtracted 0.04 percentage points from the leading indicators index. The preliminary gauge for June rose to a greater-than-expected 94.8, suggesting consumers were buoyed by an improved employment outlook and lower gasoline prices. That could contribute to an improvement in the Conference Board index for June.
Reports last week showed prices paid by consumers and producers fell in May. Excluding food and energy costs, consumer prices rose 0.1 percent last month, less than economists forecasted.
The narrower gap between short-and long-term bond yields subtracted 0.14 percentage points from the index.
``We remain skeptical of the index as a tool for predicting the direction of growth,' said Joseph Abate, a senior economist at Lehman Brothers Inc. in New York. ``It is difficult to ascribe all the recent flattening in the yield curve wholly to perceptions of weaker growth.'
Bonds
The yield on the 10-year Treasury note fell to an average of 4.14 percent in May from 4.32 percent in April, and has declined further since then. The effective federal funds rate, the short- term rate used in the index, averaged 3 percent in May, leaving a difference, or spread, of 1.14 percentage points. The spread in April was 1.55 percentage points.
``There's a lot of discussion out there about what the flattening of the yield curve means,' Stephen Malyon, an economist at Scotia Capital Inc. in Toronto, said. ``Our forecast is for slower growth, so we think that's a part of it. But the yield curve is probably sending us signals on both sides.'
Federal Reserve Chairman Alan Greenspan called the narrowing rate gap a ``conundrum' in February. He cited several possible explanations last month for converging yields, including demand for long-term bonds from pensions funds and purchases by Asian central banks. None of these explanations is adequate, Greenspan said. The freer flow of capital worldwide means a narrowing gap may no longer signal softer growth, he said.
Debate
Economists such as Kevin Harris at Informa Global Markets in New York disagree. ``Both in their direction and their magnitude, all the indicators point in the same direction: to growth slowing,' Harris said. ``The Fed seems not to think that's true.'
Adding to the decline in the leading indicators index was a drop in building permits, an increase in average weekly jobless claims and slower deliveries by vendors.
A fall in consumer confidence also contributed to the decline. The only positive contribution came from higher stock prices. The Standard & Poor's index rose to an average 1178.3, from 1164.6 in April.
Economists once regarded three straight declines in the leading index as foreshadowing recession. That rule of thumb has since been discarded because it was inaccurate. From June through October 2004, the leading index declined while the economy grew 4 percent in the third quarter and 3.8 percent in the fourth.
Six-Month Rate
The Conference Board has since said that a six-month annualized decline of 3.5 percent or more would suggest imminent risk of recession. The six-month annualized decline in May was 2.2 percent.
The Conference Board's index of coincident indicators, a gauge of current economic activity, rose 0.2 percent in May, the same as the month before. The index tracks payrolls, incomes, sales and production.
The index of lagging indicators rose 0.3 percent last month, compared with a 0.1 percent increase in April. The index tracks business lending, length of unemployment, services prices and ratios of labor costs, inventories and consumer credit.
Economists surveyed by Bloomberg News earlier this month raised their expectations for economic growth this year to 3.5 percent from a previous forecast of 3.4 percent.
``The underlying fundamentals are strong nationwide -- low interest rates, low inflation, robust productivity growth, and strong business balance sheets,' Fed Bank of Cleveland President Sandra Pianalto said last week at a manufacturing conference in Cleveland. ``I expect the national economy to continue to grow through the remainder of this year and beyond.'
Fed
The Fed's Open Market Committee meets to discuss interest rates on June 29-30. They are expected to raise the benchmark overnight interest rate by a quarter percentage point to 3.25 percent at that time, according to the Bloomberg survey of economists.
``The economy is doing very well,' James Tisch, chief executive of Loews Corp. and Diamond Offshore Drilling Inc., said in an interview last week. ``In the spring, people thought that the economy was slowing down. I think there's a sense now that the economy is growing between 3 percent and 4 percent.'
Occupancy at New York-based Loews's hotels is up ``significantly, as are average room rates,' and all of the company's businesses are doing well, Tisch said.
To contact the reporter on this story:
Courtney Schlisserman in Washington cschlisserma@bloomberg.net
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