- The Washington Times - Tuesday, August 21, 2001

A key predictor of future economic activity rose for a fourth straight month in July, signaling that the economy should be emerging from its deep slump by the end of the year.
The 0.3 percent gain in the Conference Board's Index of Leading Indicators was spurred largely by the Federal Reserve's interest-rate cuts and expansion of the money supply since January.
The index also reflects a decline in unemployment claims last month and gains in consumer expectations and the manufacturing workweek, among the positive indicators. The report monitors 10 business indicators that are thought to be reliable predictors of future economic activity.
The Fed's dramatic cuts have spurred an increase in several of the indicators, but the economy itself has shown few signs of significant improvement — prompting most analysts to expect the central bank to approve a seventh rate cut today.
The prospect of another rate cut and yesterday's report predicting an upturn in the economy six months down the road helped spawn a rally in the stock market. The Dow Jones Industrial Average rose 79 points yesterday to 10,320.
"Economic conditions, sluggish through the entire first half of the year, could begin to make way for a better economy this fall," Conference Board economist Kenneth Goldstein said.
But he noted that the Fed's actions, which have prompted the increases in the leading indicators in recent months, so far have failed to spark a broad business recovery. In addition, some indicators continue to point downward, including a drop in building permits in July.
The primary beneficiary of the Fed's largesse so far has been the housing market, where low interest rates have triggered a binge of home-building and near-record sales this year. But the downturn in building permits last month points to slower growth in this sector in the future.
The hardest-hit sector of the economy — technology — has not benefited much from the rate cuts because tech companies overinvested in earlier years and are not selling enough to justify taking out loans and making further investments this year, economists say.
Most businesses and consumers eventually will benefit from the dramatically lower borrowing costs, if only through refinancing and consolidating debts. That is the reason economists predict a recovery by the end of the year, even if it is a sluggish one.
Ed Yardeni, chief investment strategist at Deutsche Banc Alex. Brown, said the leading indicator report is predicting a "U-shaped" recovery — a prolonged period of lackluster growth before healthy growth resumes.
That will keep the Fed in a rate-cutting mode until the end of the year. The strong performance of the housing market "won't get much better" and consumer spending will be increasingly weighed down by worries about jobs, he said.
"We know that help-wanted advertising went down a lot in June, and layoffs continue to mount. Many of those are among fairly highly paid people who are getting severance packages, and that's why they're not in the jobless claims statistics," he said.
Mr. Yardeni does not expect this summer's $38 billion of tax rebates to add much to consumer spending. A survey this month by the University of Michigan found that 82 percent of consumers expect to use their rebates to pay off debts or add to savings, neither of which would add to economic growth.
"The rebate may not have anywhere near the short-term positive impact on the economy that the Bush administration and lots of economists have been hoping for," Mr. Yardeni said.
Michael Swanson, economist with Wells Fargo & Co., said the economy is "getting itself back on track" for growth, but at a frustratingly slow pace that has failed to reassure investors.
The leveling off of jobless claims, for example, has not spurred significant increases in consumer confidence and spending, which ac-counts for two-thirds of economic growth. And manufacturing and technology remain mired in recession.
As long as the recovery remains in question, the Fed will keep trimming rates, Mr. Swanson said. "Both the Federal Reserve and the federal government will do what it takes to keep" consumers spending, he said.

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