U.S. Economy: Leading Indicators, Manufacturing Index Slow

Aug. 19 (Bloomberg) -- The index of leading U.S. economic indicators fell in July and Philadelphia-area manufacturing expanded at a slower pace this month, signs that record energy prices are keeping growth from accelerating.

The New York-based Conference Board's gauge of the economy's likely performance over the next three to six months fell 0.3 percent last month after a revised 0.1 percent drop in June. The Federal Reserve Bank of Philadelphia's general economic index fell to 28.5 in August from 36.1 the previous month.

Rising oil costs contributed to the slowest growth in more than a year in the second quarter and to a 3.4 percent decline in July in the Standard & Poor's 500 Index, one indicator tracked by the Conference Board. Fewer Philadelphia-area companies saw an increase in orders, suggesting the slowdown extended into August. Crude-oil prices today set a sixth straight record in New York.

``Record oil prices run the risk of prolonging the second- quarter slowdown in U.S. economic activity,'' said Sherry Cooper, chief economist at BMO Nesbitt Burns in Toronto. ``The stock market is signaling just that.'' The Dow Jones Industrial Average has fallen 3.8 percent this year.

The Philadelphia Fed's index measuring the outlook for six months was more optimistic than the Conference Board report, rising to 52.7, the highest since January, from July's 36.3. In the report, all figures greater than zero indicate expansion.

``We are running into some headwinds but the economy is still growing and expanding and creating jobs,'' Treasury Secretary John Snow said in a morning interview from Springfield, Missouri.

Earlier today, the Labor Department said initial jobless claims fell 3,000 last week to 331,000. The report marked the third straight weekly decline, the first time that's happened since April. Filings have averaged 344,600 this year, down from 402,000 for all of last year.

Forecasts

The Philadelphia Fed index was forecast to fall to 30 after a July reading of 36.1, according to the median estimate in a Bloomberg News survey. The median forecast was a 0.1 percent decrease for the July index of leading economic indicators.

``We are still growing, we just aren't growing as fast,'' said Tim McGee, chief economist at U.S. Trust Corp. in New York. ``We aren't going back into a recession but we are moving toward a more sustainable growth rate of around 3 percent to 4 percent.''

U.S. Treasury 10-year notes traded close to a four-month high on speculation oil prices will restrain the economy. The Treasury's 4 1/4 percent note maturing in August 2014 rose 1/8 point, pushing down its yield to 4.22 percent at 1:23 p.m. in New York from 4.24 percent yesterday.

Philadelphia Fed

Crude oil futures for September delivery rose as high as $48.20 a barrel, the highest since oil began trading in New York in 1983, as fighting in Iraq raised concern about the country's ability to sustain exports. A report yesterday showed falling oil inventories in the U.S.

The Philadelphia Fed's measure of new orders declined to the lowest level in three months, while an index of prices paid for oil, steel and other raw material prices rose. Rising costs may be restraining orders and keeping manufacturing from accelerating.

The index is ``more an indication of a pause in rapid growth than anything else,'' said Michael Trebing, an economist at the Fed bank, in a conference call. ``The overall conclusion is we are still seeing growth.''

The report is watched by economists and investors for clues about the performance of total U.S. manufacturing, which accounts for one-eighth of the economy. A report earlier this week from the New York Fed showed manufacturing in that region expanded at a slower-than-expected pace amid a slowdown in orders and sales.

The increase in the expectations index is ``telling us that any pullback in the Philadelphia area manufacturing sector should be temporary,'' said Joseph LaVorgna, chief U.S. fixed income economist at Deutsche Bank Securities in New York.

Conference Board

The Conference Board's index of coincident indicators, a gauge of current economic conditions, rose 0.1 percent last month, compared with a no change in June. The index tracks payrolls, incomes, sales and production. The index of lagging indicators increased 0.5 percent in July after no change.

Gross domestic product, the sum of all goods and services produced in the U.S., is forecast to rise 3.9 percent at an annual rate in the current quarter and 4.1 percent in the final three months of the year, according to the median estimate of 54 economists surveyed by Bloomberg News from July 30 to Aug. 6. The economy grew at a 3 percent rate in the second quarter.

``I think the economy is still in very good shape but it isn't growing at the same pace as before and I think the GDP numbers have shown that as well,'' said John Chambers, chief executive officer at Cisco Systems Inc., in an interview at the company's San Jose, California, headquarters.

Investors view Cisco, whose routers run 70 percent of the world's Internet traffic, as a bellwether for technology spending.

6 of 10 Indicators Slow

Six of the 10 indicators that the Conference Board tracks to derive the index contributed to the decline in July. In addition to lower stock prices, the leading index was pushed down by quicker delivery times, one sign of a lower demand; a narrower spread between the yield on the 10-year Treasury note and the federal funds rate; a decline in the money supply; more jobless claims, and fewer capital goods orders.

Among the indicators underpinning the leading index was building permits. Permits, a sign of future construction, rose 5.7 percent in July, the Commerce Department said this week. Consumer confidence, worker hours and orders for consumer goods all made positive contributions.

Chief executives at some of the fastest-growing U.S. companies were less optimistic about the economy in June than they were in March, a private survey by BSI Global Research Inc. reported Monday.

CEO Sentiment

More than half of them were concerned about ``the stability of demand'' and the number of those ``optimistic about the economy's prospects over the next 12 months'' fell to 76 percent in the second quarter from 81 percent in the first three months of the year.

``There's a lot of uncertainty right now with the presidential elections and oil prices and kind of the mixed economic indicators,'' Agilent Technologies Inc. Chief Executive Ned Barnholt said in an interview last week from Mountain View, California. ``Companies are being very cautious.''

``An inherently vulnerable U.S. economy could be hit hard by another oil shock,'' said Stephen Roach, chief economist at Morgan Stanley in New York, in a note to clients. ``This oil price run-up has all the characteristics of the disruptive shocks of the past. It doesn't take much to tip an already vulnerable economy into recession.''

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