U.S. Leading Economic Index Increased 0.6% in August (Update2

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    U.S. Leading Economic Index Increased 0.6% in August (Update2)
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    By Shobhana Chandra

    Sept. 21 (Bloomberg) -- The index of U.S. leading economic indicators rose for the fifth straight month, capping the longest stretch of gains since 2004 and signaling a recovery is under way.

    The Conference Board’s gauge of the economic outlook for the next three to six months rose 0.6 percent in August, in line with forecasts, after a 0.9 percent increase in July that was larger than previously estimated, according to data that the New York-based group released today.

    The gains in stock prices, consumer confidence and homebuilding that are buoying the leading index bolster Federal Reserve Chairman Ben S. Bernanke’s view that the worst recession since the Great Depression has probably ended. At the same time, rising unemployment and tight credit are a reminder that a rebound will be slow and gradual.

    The report “is another signal that economic growth is turning sharply positive this quarter,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York. “All of the elements for a robust recovery are falling into place. As we look ahead, job losses will end and the unemployment rate will stop rising, but we’re not there yet.”

    The index was projected to rise 0.7 percent, according to the median forecast of 58 economists in a Bloomberg News survey, after an originally reported increase of 0.6 percent in July. Estimates ranged from unchanged to a gain of 1 percent.

    Stocks Fell

    U.S. stocks fell on speculation a six-month rally has outpaced prospects for profit growth. The Standard & Poor’s 500 Index closed down 0.3 percent to 1,064.66 today in New York. Treasuries were little changed, with the yield on the 10-year benchmark note at 3.48 percent compared with 3.47 percent on Sept. 18.

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

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

    The Conference Board’s index of coincident indicators, a gauge of current economic activity, was unchanged in August after increasing 0.1 percent the prior month. The index tracks payrolls, incomes, sales and production.

    Lagging Indicators

    The gauge of lagging indicators fell 0.1 percent following a 0.5 percent drop in the prior month. The index measures business lending, length of unemployment, service prices and ratios of labor costs, inventories and consumer credit.

    Five of the 10 indicators in today’s report added to the leading indicators index, led by a gauge of supplier deliveries, interest-rate spreads and the stock market.

    The S&P 500 Index has soared 57 percent since March 9, when it hit a 12-year low, as optimism grew that the U.S. was pulling out of the downturn. A jump during August in the S&P 500 average from July’s average added 0.3 point to the leading indicators gauge.

    Building permits, a sign of future construction, and a gauge of consumer expectations also contributed.

    Permits rose 2.7 percent to a 579,000 annual rate in August, the Commerce Department said on Sept. 17. The Reuters/University of Michigan index of consumer expectations six months from now, considered a proxy for future spending, rose to 65 in August and this month climbed to 69.2, according to a preliminary reading.

    ‘Improving Trends’

    Officials at some companies are already seeing a pickup in demand. Best Buy Co., the world’s largest electronics retailer, raised its full- year earnings forecast last week even while reporting a drop in second-quarter profit, citing “improving trends” for sales.

    “Customer traffic patterns have started to indicate signs of stability,” Jim Muehlbauer, chief financial officer for Richfield, Minnesota-based Best Buy, said in a Sept. 15 statement.

    Money supply adjusted for inflation, which has the biggest weighting in the leading index and subtracted the most of any measure in the August report, took away 0.3 point.

    The average number of weekly applications for unemployment benefits rose in August from the prior month, subtracting 0.09 point from the leading index and a reminder that consumer spending is unlikely to lead the recovery.

    Jobless Rate

    Economists predict claims will subside gradually. Claims dropped by 12,000 to 545,000 in the week ended Sept. 12, according to Labor Department data, while the total number of people collecting benefits rose.

    The economic expansion projected to start this quarter won’t be enough to keep the unemployment rate from reaching 10 percent by the end of the year for the first time since 1983, according to a Bloomberg survey of economists this month. The rate rose to 9.7 percent in August, from 9.4 percent in July.

    Unemployment rose in 27 U.S. states in August, with California, Nevada and Rhode Island reaching record levels of joblessness, the Labor Department reported Sept. 18 in Washington. California’s unemployment rate reached 12.2 percent and Nevada’s climbed to 13.2 percent.

    “There’s still a fair amount of weakness in some of the larger states,” said Steven Cochrane, director of regional economics at Moody’s Economy.com in West Chester, Pennsylvania. “State finances are probably going to be among the last of all the various components of the broad economy to turn around.”

    To contact the reporter on this story: Shobhana Chandra in Washington schandra1@bloomberg.net

    Last Updated: September 21, 2009 16:56 EDT