Tuesday, July 21, 2009

More evidence emerged Monday indicating that the longest postwar recession will probably end this year, although the recovery likely will be slow and unemployment will remain high, analysts said.

The Conference Board, a private research group, reported that its index of leading economic indicators rose in June. It marked the first time since 2004 that the index showed three consecutive monthly increases.

Higher numbers of building permits for new homes, declining claims for jobless benefits and rising orders for consumer goods were among the key factors that improved the forecast.

With a rally this spring, rising stock prices also lifted the index. The Dow Jones Industrial Average completed its best week of the year Friday with a 7 percent gain. Another 100-point gain Monday pushed the Dow to its best close since January, while the Standard & Poor’s 500 climbed to its highest finish since November.

The Conference Board’s Leading Economic Index, which is designed to predict economic activity in the next three to six months, increased 0.7 percent in June after jumps of 1.3 percent in May and 1 percent in April.

Seven of the 10 leading indicators improved in those three months.

“The recession has been losing steam since the spring, although very large job losses continue,” said Ken Goldstein, an economist at the Conference Board. Improving trends have included a slow rebuilding of confidence, a stabilizing housing market and less volatile financial markets, he said.

“If these trends continue, expect a slow recovery this autumn,” Mr. Goldstein said.

After the collapse of Lehman Brothers in September and the ensuing freeze in credit markets, the economy shrank at an annual rate of 6.3 percent during the fourth quarter of 2008 and 5.5 percent in the first quarter of this year.

The pace of contraction slowed in the second quarter to between 1 percent and 3 percent, according to most economists’ estimates. The Commerce Department will issue its advanced estimate for gross domestic product on July 31.

The unemployment rate has continued to rise, reaching 9.5 percent in June, the highest level since 1983.

Analysts at Moody’s Economy.com and Wells Fargo Securities expect economic growth to return this summer.

The Leading Economic Index “rose 0.7 percent in June, capping an impressive 7.4 percent annualized increase in the second quarter that is consistent with a return to growth this summer,” said Aaron Smith at Moody’s Economy.com.

“The stage is set for at least a technical rebound,” led by a swing in inventories during the third quarter, Wells Fargo said in a research note to clients.

But final demand, which is the difference between gross domestic product and changes in private inventories, “is not improving,” Wells Fargo said. “Without any improvement in final demand, the rebound in production we are expecting for the third quarter will not be sustainable, setting us up for a decline in output this fall.”

Even if the economy begins to recover later this year, the pace is not likely to be sufficiently robust to significantly reduce the unemployment rate next year and even well into 2011, according to the Federal Reserve’s latest forecast.

The Fed expects the unemployment rate to average about 10 percent this year and 9.5 percent or higher next year. The 2011 jobless rate probably will remain above 8.5 percent, according to Fed projections.

By contrast, the U.S. unemployment rate peaked at 10.8 percent in November 1982 at the trough of the deepest postwar recession before the current downturn. Two years later, when President Reagan captured 49 states in his landslide re-election, the unemployment rate had plunged by one-third to 7.2 percent.

The initial recovery from the relatively mild 2001 recession, which ended in November of that year, was far less robust than the expansion after the 1981-82 recession. The employment rate did not reach bottom until August 2003, more than 20 months after the recession ended.

The recovery after the mild 1990-91 recession was also initially sluggish. The unemployment rate peaked at 7.8 percent in June 1992, 15 months after the recession ended, dooming President George H.W. Bush’s chances for re-election.

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