Your Economy (No Politics)

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Leading Indicators Index Points to Slower Growth
by Courtney Schlisserman in Washington


Jan. 23 (Bloomberg) -- An index of U.S. leading indicators released today pointed to a slower pace of economic growth in three to six months.

The New York-based Conference Board's index for December rose 0.1 percent after November's revised 0.9 percent increase. Six of the 10 segments that make up the index were positive.

Oil prices near a five-month high are leaving consumers less to spend on other goods, curbing the economic expansion, economists said. A five-year housing boom is cooling as higher interest rates and home prices push buyers out of the market, limiting profit growth at builders such as D.R. Horton Inc.

``We're not going to see the blistering pace of growth we had before, but I don't think we're necessarily going to fall apart either,'' said Glenn Haberbush, an economist at Mizuho Securities USA Inc. in New York. ``It's a healthy economy.''

The economy will grow at a 3.4 percent annual rate this year, according to a Bloomberg survey of economists taken from Dec. 23 to Jan. 9. That would be slower than last year's 3.6 percent estimated pace and above the average growth of 2.8 percent in the years 2002 through 2004.

Economists expected a 0.2 percent increase in December's leading index from an initially reported 0.5 percent gain in November, according to the median of 51 forecasts in a survey by Bloomberg News.

Consumer expectations contributed most to the gain in the index, adding 0.31 percentage point. Money supply was the next largest contributor, adding 0.21 percentage point.

Consumers grew more optimistic about the economic outlook in December, according to a University of Michigan survey. The university's index of consumer expectations rose to 80.2, from November's 69.6. The gauge is continuing to rise this month, reaching 81.5 in a preliminary report released on Jan. 20.

Growth Outlook

Weekly unemployment claims averaged 316,900 last month, down from 322,800 in November, according to the Conference Board. Claims fell in the second week of January to the lowest level in more than five years and the number of people continuing to collect unemployment insurance has slipped, suggesting more people are finding jobs.

U.S. weekly jobless claims rose to as much as 435,000 after Hurricane Katrina hit the U.S. Gulf Coast on Aug. 29. The storm was followed by Rita on Sept. 24 and Wilma on Oct. 24. The three storms together resulted in about 603,600 people filing claims, according to the Labor Department.

Katrina shut down oil production in Louisiana and Mississippi, causing oil and gas prices to jump to records. Declining gas prices since the beginning of September have helped boost consumer confidence, economists said.

``The indicators may be signaling a spurt of growth ahead, perhaps in the spring, which could be followed by a slower pace of activity later in 2006,'' said Ken Goldstein, labor economist at the Conference Board, in a statement.

Interest Rates

The risks of a significant slowdown in growth or an outbreak of inflation are ``quite small,'' Federal Reserve Bank of St. Louis President William Poole said in an interview.

``The consensus is that the economy's growth is slowing just a bit,'' he said in an interview from his office on Jan. 20. ``We're getting up around full employment, close to it by most measures, and it's appropriate for the economy to slow to the long-run trend.''

Forty-five percent of companies surveyed by the National Association of Business Economics said they plan to raise prices in the next three months. The poll, released today, showed that demand for goods and services is rising and that executives expect the economy to grow at an annual rate of 3 percent to 4 percent in the first half of the year.

Federal Reserve policy makers meeting on Jan. 31 will probably raise interest rates for a 14th consecutive time, to 4.5 percent, according to a Bloomberg survey of economists.

Consumer Prices

``As the Fed's interest rate increases filter through to the economy they're going to have a dampening effect,'' said economist Haberbush, who predicts the economy will grow 3.25 percent in the second half of this year.

Consumer prices excluding food and energy rose 2.2 percent last year, matching the gains in 2004 and the average for the last decade, according to a government report Jan. 18. That suggests the economy isn't overheating, economists said.

The index of leading economic indicators rose to 138.5 in December from 138.4 the month before. The index has a base value of 100 established in 1996.

Seven of the 10 components that make up the index are known before the report is published: jobless claims, consumer expectations, the yield curve, building permits, stock prices, supplier delivery times and factory hours.

The remaining three -- new orders for consumer goods, non- defense capital goods and money supply -- are estimated by the Conference Board.

Building Permits

Seagate Technology, the world's biggest maker of computer disk drives, said on Jan. 18 that its fiscal second-quarter profit almost doubled because of increased demand for personal computers and consumer electronics.

``We expect this performance to continue,'' Chief Executive Officer William Watkins said on a conference call. ``The most exciting area continues to be consumer electronics.''

Building permits fell to a 2.068 million annual rate in December and subtracted 0.12 percentage point from the leading index.

Other measures that weighed on the index included vendor performance, which subtracted 0.34 percentage point, and new orders of non-defense capital goods.

`Struggling'

The Institute for Supply Management's index of factory supplier deliveries, which measures how long it takes to receive materials, fell to 53.5 in December. The manufacturing workweek declined by 6 minutes to 40.7 hours, according to the Labor Department.

``The economy looks like it's struggling,'' James Ziemer, CEO of Harley-Davidson Inc., said in an interview on Jan. 19. ``It's on that fence post where it doesn't know if it wants to stay up there or fall off and between a lot of different things. A rise in interest rates, certainly rising energy costs, the question if the housing market is going to topple. It has a lot of concerns and so it's precarious.''

The Conference Board's index of coincident indicators, a gauge of current economic activity, rose 0.2 percent in December after a 0.4 percent increase the month before. The index tracks payrolls, incomes, sales and projections.

The group's gauge of lagging indicators rose 0.1 percent after a 0.5 percent increase in November. The index measures business lending, length of unemployment, services prices and ratios of labor costs, inventories and consumer credit.

http://www.bloomberg.com/apps/news?pid=10000087&sid=aXvivpRWJiz0