U.S. Economy: Leading Indicators Fall, Claims Jump

Bloomberg
Sep. 22, 2005

Sept. 22 (Bloomberg) -- The U.S. economy softened in August even before Hurricane Katrina struck and the storm sent first- time unemployment claims to a two-year high, separate reports showed.

The index of leading indicators slid 0.2 percent after a revised 0.1 percent decline in July, the first back-to-back drops since 2001, the New York-based Conference Board said. Initial applications for unemployment benefits rose to 432,000 last week, the most since July 2003, the Labor Department reported.

A drop in consumer confidence was the biggest contributor to the decline in the leading index. Sentiment is sliding further with the approach of a second storm, Rita, which drove gasoline prices higher today as it threatened to shut refineries in Texas. Slumping confidence may sap spending and weaken economic growth.

``We're going to get some pretty soft economic numbers for September and October,'' said Michael Gregory, a senior economist at BMO Nesbitt Burns in Toronto. ``There's going to be a direct negative impact on the economy from Hurricane Katrina, and you've already started to see that in some of the confidence and spending figures that are a knee-jerk reaction to higher energy prices.''

The leading index is a composite of 10 indicators intended to show how the economy may perform over three to six months. Three indicators turned down, two were unchanged and five rose.

The index was forecast to decline 0.3 percent following a previously reported 0.1 percent gain in July, based on the median of 54 forecasts in a Bloomberg News survey.

Jobs Lost

The Standard & Poor's 500 Index fell 1.04, or 0.1 percent, to 1208.95 as of 1:02 p.m. in New York. Hurricane Rita pushed energy shares such as Exxon Mobil Corp. higher as insurers including American International Group Inc. declined.

About 103,000 claims last week were from people thrown out of work by the hurricane, a Labor Department spokesman said. All told, the storm has accounted for 214,000 claims since it struck the Gulf Coast region Aug. 29.

Claims from the prior week were revised to 424,000 from an initially reported 398,000 as the government processed applications from the region affected by the hurricane. The figures will continue to be revised higher in coming weeks, a Labor spokesman said.

Katrina, which killed more than 1,000 people, may cost the economy 400,000 jobs and a cut a percentage point from economic growth in the second half of the year, according to the Congressional Budget Office.

Growth Forecast

The International Monetary Fund yesterday shaved its forecast for U.S. growth this year, predicting lower consumer spending because of Katrina. The economy will expand 3.5 percent, compared with an April estimate of 3.6 percent, the Washington-based lender predicted.

Federal Reserve policy makers raised their benchmark interest rate a quarter-point to 3.75 percent this week and signaled they may increase borrowing costs again, saying the economy faces only a ``near-term'' setback after the storm.

The decision suggested the Fed is more concerned about the storm's inflationary impact. The Fed statement said high energy costs ``have the potential to add to inflation pressures.''

Rita may magnify the nation's economic woes. Prices of crude oil and gasoline jumped today as the storm headed for Texas, disrupting supplies at U.S. rigs and fineries that escaped damage from last month's storm.

Consumer Confidence

Consumer confidence and spending were falling before Katrina struck. Retail sales fell 2.1 percent in August as auto purchases slumped after surging the previous month, the Commerce Department said Sept. 14.

The University of Michigan's gauge of consumer confidence for September showed the biggest plunge since 1980 after Katrina crippled oil refineries, driving energy prices higher.

Best Buy Co., the largest U.S. electronics retailer, said same-store sales will gain about 4 percent this year, a percentage point less than originally forecast, partly due to rising gasoline prices.

``Our back-to-school season was not as robust as we hoped,'' Brad Anderson, chief executive of Richfield, Minnesota- based Best Buy, said in an interview on Sept. 13.

In addition to consumer confidence, a drop in building permits and faster deliveries by suppliers, which suggests orders are slowing, also pulled down the leading index.

An increase in orders for consumer and business equipment, higher stock prices, a rising money supply and a positive differential between the yield on the Treasury's 10-year note and the overnight bank lending rate made positive contributions.

Expectations

Factory hours and first-time claims for jobless benefits were unchanged last month. That won't be repeated this month.

The jump in claims and another plunge in consumer expectations this month may shave roughly 1 percentage point from the leading index for September, said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut.

The University of Michigan's measure of consumers' views on the economy's future slumped 13.3 points this month on top of an 8.6-point drop in August, a preliminary report last week showed.