Leading Economic Indicators in U.S. Unexpectedly Rise

By Timothy R. Homan

Oct. 20 (Bloomberg) -- The index of U.S. leading economic indicators unexpectedly rose in September, led by a surge in the money supply as the Federal Reserve pumped cash into the economy to unfreeze clogged credit markets.

The Conference Board's gauge increased 0.3 percent after a 0.9 percent decline the prior month that was almost twice as large as previously estimated, the New York-based private research group said today. The index points to the direction of the economy over the next three to six months.

Credit tightened further this month making it even more difficult for consumers and businesses to borrow. Fed Chairman Ben S. Bernanke today warned that the economy would probably slow for ``several quarters'' as spending and business investment weakened.

``October's index will plunge,'' said Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, New York, who correctly forecast the gain. The index ``is consistent with recession, and it has not hit bottom yet.''

The leading index was forecast to decline 0.1 percent, according to the median of 53 economists in a Bloomberg News survey. Estimates ranged from a drop of 0.6 percent to a gain of 0.5 percent.

Stocks Rise

Stocks maintained gains following the report, reflecting a drop in global money-market rates. The Standard & Poor's 500 index rose 2% to 959.6 at 10:50 a.m. in New York. Treasury securities were little changed.

The measure decreased at a 2.5 percent annual pace over the past six months. 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 extreme volatility in the financial market, and the near freeze-up of credit, will no doubt weaken the economy further,'' Ken Goldstein, an economist at the Conference Board, said in a statement. ``Data on hand reflect a contracting economy, but not one in free fall.''

Six of the 10 indicators in today's report contributed to the gain. In addition to the money supply and interest-rate spread, consumer expectations, supplier deliveries and orders for capital and consumer goods, were positive.

Growing Pessimism

The jump in consumer expectations was already reversed this month. The Reuters/University of Michigan's preliminary October sentiment index last week showed Americans' outlook on the economy sank. Overall confidence dropped by the most on record.

A drop in building permits, an increase in jobless claims, a drop in stock prices and a decrease in manufacturing hours were negative factors in the leading index.

Economists surveyed by Bloomberg in the first week of October anticipated the economy contracted at a 0.2 percent annual pace last quarter and will shrink at a 0.8 percent pace in the last three months of the year. Declines in consumer spending will tip the economy into a recession, the survey showed.

``Incoming data on consumer spending, housing and business investment have all showed significant slowing over the past few months, and key determinants of spending have worsened,'' Bernanke said today during testimony before Congress. ``The pace of economic activity is likely to be below that of its longer-run potential for several quarters.''

Endorses Stimulus

Bernanke, broke with the Bush Administration, and endorsed consideration of a second fiscal stimulus package.

The housing slump is showing no indication of abating. Building permits, a sign of future construction, dropped 8.3 percent in September, matching the lowest level since 1981, and single-family home starts fell to a 26-year low, the Commerce Department reported last week.

The U.S. has lost 760,000 jobs so far this year, and the jobless rate held at a five-year high of 6.1 percent in September. More job cuts are on the way.

Danaher Corp., the maker of Craftsman tools and Tektronix measuring devices, said last week it plans to eliminate 1,000 jobs and close 12 factories. Lawrence Culp, chief executive officer of the Washington-based company, said in a conference call Oct. 16 that the steps were taken to ``get ready for what may come'' as the U.S. economy falters.

The Standard & Poor's 500 index averaged 1217 in September, down from 1281.47 in August. Stock prices this month are down even more. The index averaged 1,001.38 during the first 17 days of October.

Coincident Index

The index of coincident indicators, a gauge of current economic activity, dropped 0.5 percent, the biggest decline since August 2005, after no change in August.

The index tracks payrolls, incomes, sales and production, which, combined with gross domestic product, are the figures used by the National Bureau of Economic Research to determine whether a recession has begun. The measure peaked one year ago, which is why some economists anticipate the group will eventually announce an economic contraction started in late 2007 or early 2008.

The gauge of lagging indicators decreased 0.2 percent. The index measures business lending, length of unemployment, service prices and ratios of labor costs, inventories and consumer credit.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net