U.S. Leading Economic Indicators Plunged In July

The index of U.S. leading economic indicators fell 0.7 percent in July, pointing to "slow growth the rest of the year, and possibly an economy grinding to a halt," the Conference Board, a private-research firm, reported Thursday, August 21, 2008. The index decline has been the sharpest since the credit crunch began at the end of last summer, August 2007.


Five of the ten indicators declined in July, led by building permits and stock prices. Building permits, a sign of future construction, fell 18 percent in July, while work began on the fewest houses in 17 years. A 0.25 percentage point drag came from the Standard & Poor's 500 index; its July average was down to 1257.3 from June's 1341.2.

The big declines in the leading index were partly offset by gains in consumer expectations and the interest rate spread, which marks the difference between the Federal Funds rate and the yield on 10-year U.S. Treasury bonds.

The leading index predicts the direction of the economy over the next three to six months. The index decreased at a 1.8 percent annual pace over the past six months with seven of the 10 indicators falling over that period. A decline of around 4 percent to 4.5 percent at an annual pace 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 numbers are consistent with the weak economy right now, probably an economy in recession,'' James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut, said in a Bloomberg Television interview.

The leading index decline reinforces the darkening outlook for growth. The worst housing recession in a quarter century, rising job cuts and shrinking access to credit raise the risk that consumer spending will falter by year-end. The contraction in consumer spending, in turn, will halt the economic expansion.

Seven of the ten economic indicators that make up the index are known ahead of time. They are stock prices, jobless claims, building permits, consumer expectations, the yield curve, supplier delivery times and factory hours. The Conference Board estimates the remaining three, which are new orders for consumer goods, bookings for capital goods, and the money supply adjusted for inflation.