Leading Index Probably Fell in September: U.S. Economy Preview

By Timothy R. Homan

Oct. 19 (Bloomberg) -- The U.S. economic outlook for the next two quarters dimmed in September and foreclosure-driven declines in property values aided sales of existing homes, economists said before reports this week.

The index of leading indicators fell 0.1 percent last month, according to the median estimate in a Bloomberg News survey ahead of a Conference Board report tomorrow. On Oct. 24, the National Association of Realtors may say that home resales rose 1 percent to an annual rate of 4.95 million.

While houses have become more affordable, the boost to sales from lower prices may be short lived as banks make mortgages more difficult to get and concern mounts that values will keep plunging. Add rising unemployment, and Americans are likely to spend less across the board, deepening the economic slump heading into 2009.

``Mortgage defaults and home prices need to stabilize,'' said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. ``It will take time to slow the vicious cycle of declines in credit markets, housing and the economy.''

The Conference Board's leading index, a gauge of the economy's direction over the next three to six months, has posted only two monthly gains this year.

Seven of the 10 components of the leading index are known ahead of time: jobless claims, stock prices, building permits, consumer expectations, the yield curve, supplier delivery times and factory hours.

The Conference Board estimates the remaining three -- new orders for consumer goods, bookings for capital equipment and the money supply adjusted for inflation.

Recession Forecast

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.

Lower stock prices in September contributed to the decline in the leading index. The Standard & Poor's 500 index averaged 1217 in September, down from 1281.47 in August. The 500 index averaged 1011.91 during the first half of this month.

The Realtors' existing home sales report may show sales improved in September after dropping 2.2 percent the previous month, when the median price declined 9.5 percent from August 2007.

Fewer Closings

A report earlier this month from the agents' group showed 7.4 percent more Americans signed contracts to purchase previously owned homes in August. Economists are anticipating that only a small percentage of those contracts actually closed last month as banks started to shut off credit on growing concern over defaults and foreclosures.

``Elevated inventories and stubborn long-term rates should contribute to a third consecutive month of price declines for existing homes,'' said Maxwell Clarke, chief U.S. economist at IDEAglobal in New York.

Resales have averaged a 4.94 million annual pace this year, compared with a total of 5.65 million in 2007.

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 housing market continues to be a primary source of weakness in the real economy as well as in the financial markets, and we have seen marked slowdowns in consumer spending, business investment and the labor market,'' Federal Reserve Chairman Ben S. Bernanke said in a speech last week. ``Credit markets will take some time to unfreeze.''

Job Losses

U.S. companies have cut 760,000 jobs so far this year. The jobless rate in September held at a five-year high of 6.1 percent, the Labor Department said this month.

More firings, particular in the financial field, may be on the way. Hedge funds could cut as many as 10,000 jobs by the end of the year, according to estimates by Options Group, a New York-based financial-recruiting firm.

``It's bad out there,'' Chief Executive Officer Michael Karp, whose firm has tracked hedge-fund hiring since 1995, said last week in an interview. ``Generating returns is not easy at the moment, and as the funds look to cut costs, the best way is to let go of people.''

                        Bloomberg Survey

===============================================================
                       Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
===============================================================
LEI  MOM%                10/20     Sept.     -0.5%     -0.1%
Initial Claims ,000's    10/23    Oct. 11     461       465
Cont. Claims ,000's      10/23     Oct. 4     3711      3695
Exist Homes Mlns         10/24     Sept.      4.91      4.95
Exist Homes MOM%         10/24      Aug.     -2.2%      0.8%
===============================================================

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