Leading Economic Indicators Make Largest Gain Since 2004

By Bob Blandeburgo
Associate Editor
Money Morning

The Conference Board's Leading Economic Index (LEI), which points to the direction of the economy in the next three to six months, made its largest gain in five years last month, signaling that the end of the recession may be in sight.

Supplier deliveries, interest rate spread, and stock prices were the largest of the seven positive indicators that boosted the non-profit research group's LEI 1.2% in May. The index posted a 1.1% increase in April and a 0.3% drop in March, The Conference Board said in a statement.

Other positives were real money supply, consumer expectations, building permits, and manufacturers' new orders for non-defense capital goods. Three of the ten indicators were negative: average weekly manufacturing hours, average weekly initial claims for unemployment insurance and manufacturers' new orders for consumer goods and materials.

The LEI increase was more than the 1% expected, according to the median of a Bloomberg News survey of 55 economists.

"The recession is losing steam," said Conference Board economist Ken Goldstein. "Confidence is rebuilding and financial market volatility is abating. Even the housing market appears to be stabilizing. If these trends continue, expect a slow recovery beginning before the end of the year. However, employment will take longer to turn around."

"If the overall economy picks up this fall, hiring might begin to pick up [next] spring," Goldstein told Money Morning in an e-mail.

Consumer spending, which accounts for 70% of the United States' gross domestic product (GDP), could also pick up on the rays of light in recent economic news.

"If expectations are edging higher now, we might see an uptick in consumer spending as early as this summer," Goldstein said, adding that this and the scenario on hiring is "a lot of 'ifs.'"

That "if" is partially dependent on how high gas prices go this year. While they are currently well below prices this time last year, they did increase for the 50th straight day earlier this week to a national average of $2.67.

"Higher prices for gas act just like a tax increase and has the same negative impact on spending," said Goldstein.

The Conference Board's Coincident Economic Index (CEI), which has been in a decline since just before the recession began in December 2007, continued the drop but showed signs of slowing. The CEI decreased 0.2% in May after a 0.3% decline in April and a 0.7% drop in March.

Positive indicators that made up the CEI were personal income (excluding social security and unemployment insurance) and manufacturing and trade sales. A troubled auto industry and still-increasing unemployment rate made up the negative CEI indictors, industrial production and employment.

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