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Key gauge of economy improves in April

Report may be sign slump will be mild

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Bloomberg News / May 20, 2008

WASHINGTON - The index of leading US economic indicators rose in April for a second month, the first back-to-back gain since October 2006, signaling that the current slowdown will be short-lived.

The Conference Board's gauge increased 0.1 percent, better than forecast and matching the gain in March, the New York-based research group said yesterday. The measure points to the direction of the economy over the next three to six months.

The dollar rallied after the figure spurred speculation that tax rebates and the Federal Reserve's interest-rate cuts will aid a recovery in the second half. Economists estimate the economy will expand just 0.1 percent this quarter as consumers rein in spending in the wake of falling house prices and a surge in fuel costs.

"The message on the economy is that activity is soft but not moving down sharply," said Michael Moran, chief economist at Daiwa Securities America Inc. in New York, who accurately forecast the index's gain.

The index was forecast to be unchanged, according to the median estimate of 53 economists surveyed by Bloomberg News. Projections ranged from a drop of 0.6 percent to a 0.2 percent rise. The increase in March was the first gain since September.

A decline in the index of around 4 percent to 4.5 percent at an annual pace over six months is one signal a recession is imminent, according to the Conference Board. The gauge met that requirement in January, when it dropped at a 4.7 percent pace.

"The small increases in the leading index in both March and again in April could be a signal that the economy may not weaken further," Ken Goldstein, a Conference Board economist, said.

Six of the 10 indicators in yesterday's report contributed to the gain in the index, led by rising stock prices and a widening spread between the Fed's benchmark rate and the yield on the 10-year Treasury note, known as the yield curve.

"This particular slump seems to be milder than any recession since the Great Depression," said John Lonski, a Moody's Investors Service economist.

A slump in consumer expectations about the economy and a decline in manufacturing hours were among the components that restrained the index.

The Reuters/University of Michigan sentiment index decreased in April to a 26-year low, while its expectations gauge fell to the lowest level since 1990. The measure of prospects dropped even more this month, sending sentiment to a 28-year low, the group said last week.

"The generally poor economic outlook, including well-known housing pressures, rising food and fuel prices, and a more negative employment picture eroded consumer confidence and impacted discretionary purchases for the home," Robert A. Niblock, chief executive officer at Lowe's Cos., the world's second-largest home-improvement retailer, said.

The real-estate recession is also hurting manufacturing as owners can no longer count on tapping increases in home equity to buy cars or furniture. Auto sales in April slid to a 14.4 million annual rate, the lowest since 1998. Manufacturing output fell 0.8 percent in April, the most in 2 1/2 years, the Fed said last week.

While economists forecast growth will pick up later this year, the rebound may not be vigorous. The economy will grow at a 1.2 percent rate for all of 2008, compared with a 2.2 percent pace in 2007, according to the median estimate of economists surveyed this month.

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