- The Washington Times - Thursday, February 20, 2003

NEW YORK, Feb. 20 (UPI) — The Conference Board said Thursday its key measure of future economic activity remained unchanged during January as a sharp drop in claims for unemployment insurance offset the weak expectations of consumers.

The Board said the composite index of leading economic indicators, which uses 1996 as a base of 100, remained at 111.2 in January after rising 0.2 percent in December and 0.5 percent in November.

The Board noted the leading index remains well above its peak prior to the 2001 recession and just below the previous high achieved in May 2002.

During the six-month span through January, the leading index increased 0.2 percent, with four of the ten components advancing, the Board said.

Most economists on Wall Street were expecting the gauge of the economy's performance over the next three to six months to decline 0.1 percent during the month.

Half of the 10 indicators that make up the leading index increased in January. The positive contributors to the index — beginning with the largest positive contributor — were average weekly initial claims for unemployment insurance (inverted), real money supply, vendor performance, manufacturers' new orders for consumer goods and materials, and interest rate spread.

The negative contributors — from the largest negative contributor — were index of consumer expectations, building permits, average weekly manufacturing hours, manufacturers' new orders for non-defense capital goods, and stock prices.

Leading economic indicators are a composite index of ten economic indicators that typically lead overall economic activity.

These include: the factory workweek, new orders for consumer goods, new orders for non-defense capital goods, stock prices, initial jobless claims, vendor performance, building permits, money supply, consumer expectations and the spread between the 10-year note and the federal funds rate.

Investors watch the report to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the index of leading indicators, investors will know what the economic backdrop is for the various markets.

The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly-and causing potential inflationary pressures.

The index of leading indicators is designed to predict turning points in the economy — such as recessions and recoveries.

But, analysts noted in the past ten years, this index has been less useful in predicting economic turning points, because the index tends to focus on manufacturing indicators. The economy is more service-oriented than it was 25 years ago.

Experts said the index has been more useful in predicting turning points in the index of industrial production than in the overall economy.

The latest report from the Board showed its coincident index, which also uses 1996 as a base of 100, rose 0.2 percent to 115.5 after holding steady in December and rising 0.1 percent in November. During the six-month period through January, the coincident index increased 0.2 percent.

The Board said the coincident index turned up again in January after pausing in the last quarter of 2002.

January's increase in the coincident index, the largest in six months, is consistent with the gains in the leading index late last year and reflects better current conditions in the beginning of this year.

The Board said barring any shock or prolonged uncertainty in the Middle East, the leading and coincident indexes point to a more robust pace of economic activity in the coming months.

The Board's lagging index, which also uses 1996 as a base of 100, slipped 0.1 percent to 99.2 in January after falling 0.3 percent in December and 0.4 percent in November.

The Board said two of the seven components that make up the lagging index declined. The negative contributors to the index — beginning with the larger negative contributor — were commercial and industrial loans outstanding and ratio of consumer installment credit to personal income.

Change in CPI for services is the only component that increased during the month. Average duration of unemployment, average prime rate charged by banks, change in labor cost per unit of output, and ratio of manufacturing and trade inventories to sales all held steady in January.


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