U.S. Economy: Leading Index Shows Recession May Be Nearing End

Eventually, the recession should end. Stuff wears out, people get on with their lives, the marketplace gets back to work... except, of course, if something fundamentally changes. Let's say the relationship between government and free enterprise takes a sudden shift... a discontinuity.

This happens often around the world. Cuba becomes of one-party, communist nation and major businesses are appropriated by the government. Venezuela becomes of one-party, socialist nation and major businesses are appropriated by the government. The United States becomes of one-party, socialist nation and major businesses are appropriated by the government. Then all bets are off.

U.S. Economy: Leading Index Shows Recession May Be Nearing End

By Bob Willis

July 20 (Bloomberg) -- The index of U.S. leading indicators rose in June for a third consecutive month, reinforcing signs the economy may be emerging from the worst recession in five decades.

The Conference Board’s gauge of the economic outlook for the next three to six months increased 0.7 percent, more than forecast, after a revised 1.3 percent gain in May, the New York- based research group said today. It is the first time the index has climbed for three months in a row since 2004.

Smaller job losses, rising stock prices and stabilization in homebuilding and manufacturing are evidence that government efforts to stem the financial crisis and lower borrowing costs may pay off. A jobless rate that is forecast to reach 10 percent and falling home values are a reminder that any expansion will be muted as consumers rein in spending and boost savings.

“The numbers are signaling an outright turning point,” said James O’Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. “The recession will end in the third quarter. We’re moving in the right direction.”

Stocks, one component of the leading index, extended gains following the report. The Standard & Poor’s 500 Index, which has soared more than 40 percent since its March 6 intraday low, rose 0.4 percent to 943.66 at 11:23 a.m. in New York. An advance in stocks last month contributed 0.1 percentage point to the leading index.

Exceeded Forecast

The New York-based Conference Board’s index was forecast to rise 0.5 percent, according to the median of 59 economists in a Bloomberg News survey. Survey estimates ranged from a decline of 0.3 percent to a gain of 1 percent.

Seven of the 10 indicators in today’s report added to the index while three indicators subtracted from it. A growing divergence between long- and short-term interest rates, rising stock prices, a longer factory workweek, increases in building permits and falling jobless claims contributed to the gain. Falling money supply, orders for capital goods and consumer expectations pulled down the index.

The biggest boost was provided by a widening spread between the 10-year Treasury note, where yields rose based on mounting speculation of an economic recovery, and the overnight fed funds rate.

Federal Reserve chairman Ben S. Bernanke is slated to deliver his semiannual economic report to Congress tomorrow. He’s expected to outline his strategy for exiting the biggest monetary expansion in history in order to contain inflation. Keeping a lid on prices would give the central bank leeway to maintain the overnight rate near zero for an extended period of time, economists said.

Housing Signs

The housing slump, now in its fourth year, may also be stabilizing. Building permits, a sign of future construction, climbed 8.7 percent in June, the biggest gain in a year, the Commerce Department said last week.

Economists surveyed by Bloomberg this month projected the economy will grow at an average 1.5 percent pace in the second half of the year after contracting over the previous 12 months. They also projected the jobless rate will surpass 10 percent by early 2010.

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.

Coincident Measures

The Conference Board’s index of coincident indicators, a gauge of current economic activity, dropped 0.2 percent after decreasing 0.3 percent the prior month. The National Bureau of Economic Research, the arbiter of when recessions begin and end, follows this index to help it time downturns. The index tracks payrolls, incomes, sales and production.

Improved bank earnings last quarter are among signs that credit has been at least partially restored after last year’s financial crisis.

Citigroup Inc., shored up with government bailout funds and the sale of a brokerage unit, posted a $4.28 billion profit in the second quarter, compared with a loss a year earlier.

“Losses in our consumer businesses have been growing for some time, but we see some positive signs of moderation in those loss trends,” Chief Executive Officer Vikram Pandit said in a statement last week.

The gauge of lagging indicators fell 0.7 percent following a 0.4 percent decrease in the prior month. The index measures business lending, length of unemployment, service prices and ratios of labor costs, inventories and consumer credit.

Increases in the leading index and in the ratio of coincident-to-lagging indicators for at least three months in a row are among the signals that also determine the end of recessions, according to Conference Board economist Ken Goldstein. Both those conditions were met last month.

To contact the reporters on this story: Bob Willis in Washington bwillis@bloomberg.net

Last Updated: July 20, 2009 11:31 EDT