Private forecast of economic activity rises less than expected in Oct., slow growth in 2010

Thursday, November 19, 2009

Leading economic indicators signal slow growth

NEW YORK — A private forecast of economic activity over the next six months edged up less than expected in October, signaling slow, bumpy growth next year.

The Conference Board said Thursday that its index of leading economic indicators rose 0.3 percent last month. Economists polled by Thomson Reuters had expected an 0.5 percent gain.

The index climbed 1 percent in September.

“We’re still getting some positive momentum, but it looks like things are slowing down again,” said Jennifer Lee, economist at BMO Capital Markets. “A lot of the economic growth has largely been driven by the government stimulus packages.”

The government’s Cash for Clunkers program boosted the auto sector and consumer spending, while tax credits for homebuyers have propped up the housing market.

Still, the indicators have risen for seven straight months. The Conference Board said last month that the 5.7 growth rate in the six months through September was the strongest since 1983. That ticked down to 5 percent growth in the six months through October.

The Conference Board forecasts economic activity by aggregating data on current jobless aid claims, stock prices, consumer expectations, building permits for private homes and the money supply, among others.

A measure of consumer expectations, which are dropping as unemployment continues to rise, weighed down the index. The government said unemployment hit 10.2 percent in October, a 26-year high.

“We can expect slow growth through the first half of 2010,” Ken Goldstein, economist at the Conference Board, said in a statement. “The pace of growth, however, will depend critically on how much demand picks up, and how soon.”

Uneasy consumers likely will curtail their spending, which powers about 70 percent of the U.S. economy.

Building permits, a gauge of future construction, also was a negative factor in the October index. Worries over the expiration of a federal tax credit for homebuyers restrained building last month.

Some also argue that the index isn’t as strong as it seems.

“On the face of it, the LEI is consistent with strong growth, but we think it is substantially overstating the outlook. It takes no account of the state of small businesses,” Ian Shepherdson, chief U.S. economist of High Frequency Economics, wrote in a research note.

According to the Small Business Administration, companies with less than 500 workers employ about half of the country’s private-sector employees.

The companion “coincident” index, which measures the current state of the U.S. business cycle, was unchanged in October from September. That measure has been essentially flat since June, according to Conference Board.

“It’s one step forward, two steps back,” said Lee, who expects the economy to grow 2.5 percent over 2010, with the pace picking up toward the end of the year.

In the July-September period, the government said the economy grew at a 3.5 percent annual rate, ending a record of four straight quarters of decline. But many analysts think that growth rate will be reduced next week when the government revises the data.

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