U.S. Leading Economic Indicators Index Fell 0.5% (Update1) By Bob Willis http://www.bloomberg.com/apps/news?pid=20601087&sid=atZAWJqVRFS0&refer=home March 22 (Bloomberg) -- A closely watched gauge of the future direction of the U.S. economy fell by the most in a year last month as consumer sentiment weakened and builders scaled back construction plans. The Conference Board's index of leading economic indicators fell 0.5 percent after a 0.3 percent drop in January that was initially reported as a gain, the New York-based group said today. The gauge points to the direction of the economy over the next three to six months. ``It's suggesting we'll continue to have a period of slow to moderate growth,'' said Kevin Logan, chief economist at Dresdner Kleinwort in New York. ``The softness in housing construction will persist for some time.'' A wave of subprime mortgage defaults may further shake the confidence of consumers, whose spending has been a mainstay of the expansion. Continued economic weakness increases the odds of an interest-rate cut after Federal Reserve policy makers yesterday stepped back from their preference for higher borrowing costs. Economists projected the leading index would decline 0.4 percent, according to the median of 58 estimates in a Bloomberg News survey. Forecasts ranged from a decline of 0.8 percent to a rise of 0.1 percent. Five of 10 components of the index had a negative effect on the overall number. An increase in initial jobless claims, weaker consumer sentiment, a decline in building permits and faster deliveries of goods from factories pulled the index down. Short-term interest rates that were higher than long-term rates also contributed to the decline. Stock Prices The drop in the index was limited by higher stock prices, an increase in the money supply and gains in factory orders for capital goods and consumer goods. Weekly initial jobless claims averaged 335,000 in February, up from 305,000 in January, signaling a faster pace of firings as the housing slowdown costs the economy jobs in construction and related industries. The economy generated 97,000 jobs in February, compared with a monthly average of 189,000 in 2006. Claims have improved since, a government report earlier today showed, falling by 4,000 to 316,000 in the week ended March 17, the fewest since early February. Rising gasoline prices and mounting delinquencies of subprime mortgages are taking a toll on consumer confidence and spending. The Reuters/University of Michigan gauge of consumer expectations for the next six months fell to 81.5 in February from 87.6 at the end of January. It fell further, to 79.3, in the preliminary survey for March released last week. Building Permits Building permits declined 2.5 percent in February, the government reported this week, suggesting that housing developers are continuing to scale back. Fed policy makers led by Chairman Ben S. Bernanke yesterday kept their benchmark interest rate unchanged for the sixth straight meeting, while dropping language that ``additional firming'' may be needed. ``Recent indicators have been mixed and the adjustment in the housing sector is ongoing,'' the Federal Open Market Committee said in its statement. ``Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters.'' Some economists see increased chances of an economic downturn. Former Fed Chairman Alan Greenspan said March 5 there's a ``one-third probability'' of a recession this year. He later said he expects fallout from subprime-mortgage defaults to spread to other parts of the economy, especially if home prices drop. Pickup Seen Bernanke, in response to questions following testimony in Congress last month, said ``There's a reasonable possibility that we'll see some strengthening of the economy sometime during the middle of the year.'' Stock indexes are recovering from a plunge that started late last month and were higher for February as a whole. The Standard & Poor's 500 index averaged 1444.8 last month, compared with 1424.2 in January. The economy may grow at a 2.5 percent pace in the second quarter, according to the median forecast in a Bloomberg survey taken the first week of March. That compares with a 2.2 percent rate in the fourth quarter that was revised from an initial estimate of 3.5 percent. Weaker Sales ``There is a slowdown in U.S. GDP, definitely,'' James Owens, chief executive officer of Caterpillar Inc., the largest maker of earthmoving equipment, said in an interview in Naples, Florida, last month. ``We are going to see weaker sales in comparison to a year ago in the United States, particularly in housing-related sectors.'' The Conference Board's index of coincident indicators, a gauge of current economic activity, rose 0.3 percent in February after a 0.1 percent drop in January. The index tracks payrolls, incomes, sales and projections. The gauge of lagging indicators increased 0.2 percent following no change. The index measures business lending, length of unemployment, service prices and ratios of labor costs, inventories and consumer credit. Seven of the 10 indicators that make up the leading index are known ahead of time: stock prices, jobless claims, consumer expectations, the yield curve, building approvals, supplier delivery times and factory hours. The Conference Board estimates new orders for consumer goods, orders for non-defense capital goods and money supply adjusted for inflation.