U.S. Leading Economic Indicators Fell 0.8% in October (Update1)

Nov. 20 (Bloomberg) — The index of leading U.S. economic indicators fell in October for the third time in four months as stocks and consumer confidence plunged, signaling a deepening recession.

The Conference Board’s gauge dropped 0.8 percent, more than forecast, after rising 0.1 percent in September, the New York- based group said today. The index points to the direction of the economy over the next three to six months.

Consumers and companies are cutting back as financial markets remain fragile, job losses mount and housing and manufacturing sink deeper into a slump. President-elect Barack Obama and Democrats in Congress are under pressure to push through another economic stimulus plan and give more aid to automakers.

“The economic contraction appears to be worsening,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “The stock markets are plunging, people are retrenching and manufacturing activity is virtually falling off a cliff. The increase in layoffs can only worsen the economic downturn in the near term.”

Philadelphia Fed

Another report showed manufacturing in the Philadelphia region shrank in November at the fastest pace in 18 years. The Federal Reserve Bank of Philadelphia’s general economic index was minus 39.3 this month, weaker than forecast and the lowest reading since October 1990. Negative readings signal contraction.

The leading indicators index was forecast to decline 0.6 percent, according to the median of 56 economists in a Bloomberg News survey, after an originally reported gain of 0.3 percent in September. Estimates ranged from declines of 0.2 percent to 1.2 percent.

Fed policy makers “generally expected the economy to contract moderately in the second half of 2008 and the first half of 2009 and agreed that the downside risks to growth had increased,” according to minutes of their Oct. 28-29 meeting released yesterday.

Seven of the 10 indicators that make up 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 the remaining three — new orders for consumer goods, bookings for capital goods and the money supply adjusted for inflation.

Plunging Stocks

Six of the 10 indicators in today’s report dragged the index down, led by plunging stock prices, which subtracted 0.89 percentage point. The Standard & Poor’s 500 index dropped 20 percent last month from September.

First-time claims for jobless benefits subtracted 0.02 percentage point from the leading index. Earlier today, a Labor Department report showed initial jobless claims last week surged to 542,000, the highest level since 1992, and the total number of people staying on benefit rolls in the prior week rose to the most since December 1982.

The confidence component took away 0.29 point. The Reuters/University of Michigan’s index of consumer confidence fell in October by the most on record, and the gauge of expectations for six months from now, which economists consider a proxy for future spending, also declined.

Homebuilding Downturn

Housing subtracted 0.35 percentage point. The pace of housing starts and building permits, a sign of future construction, both plunged to record lows in October, indicating the homebuilding downturn may extend into a fourth year.

Lowe’s Cos., the second-largest home-improvement retailer, reduced its full-year profit forecast following a slowdown in remodeling projects.

“We expect continued, broad-based external pressures on our industry,” Chief Executive Officer Robert Niblock said in a Nov. 17 statement. “We saw a decline in sales trends in the last week of October that continued into November as the overall economic outlook deteriorated.”

Supplier deliveries and bookings for capital equipment also subtracted from the index.

Money supply adjusted for inflation, which has the biggest weighting in the index, added 0.71 percentage point. The contribution to the index from money supply is the largest in seven years, the Conference Board said. The Fed and Treasury have injected billions of dollars into the financial system to unclog credit.

New orders for consumer goods and interest-rate spreads also added to the index.

The Conference Board’s index of coincident indicators, a gauge of current economic activity, rose 0.2 percent, after decreasing 0.7 percent the prior month. The index tracks payrolls, incomes, sales and production.

The gauge of lagging indicators rose 0.1 percent following a 0.3 percent gain in the prior month. The index measures business lending, length of unemployment, service prices and ratios of labor costs, inventories and consumer credit.

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