Skip to main content

The week got off to an ominous start Monday, as a weaker-than-expected report from the Conference Board suggested that the economy will continue to struggle through the first quarter of 2003.

"The leading indicators have gone down now for three months in a row, and that is consistent with a lot of other things that the pace of recovery is slowing," said Josh Feinman, chief economist at Deutsche Bank.

The New York-based Conference Board said its index of leading economic indicators, which predicts trends in the economy six months in advance, fell 0.2% to 111.8, after falling a revised 0.1% in July. In June, the index slid 0.2%.

The report, along with persistent worries about the state of corporate profits, sent the


to a fresh six-year low and weighed heavily on the other major stock averages.

"There's a lot of evidence of weakening on the production side, with the labor markets softening, but the spending numbers are OK," Feinman said. "There is a growing divergence between the demand indicators and the production indicators, and at some point that's going to have to get reconciled."

Economists project that the economy grew at a roughly 3% pace in the third quarter, helped by robust consumer spending. Retail sales rose for a third month in August, and home sales are expected to reach record levels this year amid extremely low mortgage rates. Sales of autos are also projected to climb to record levels, as 0% financing continues to lure buyers.

Debating the Numbers

Still, erosions in the stock market have eaten away at household net worth, and the labor market recently has shown signs of deterioration. U.S. jobless claims rose to an average of 400,000 in August, disappointing economists who had hoped to see some stabilization.

Merrill Lynch strategist Richard Bernstein said companies will continue to lay off workers this year in an attempt to restore profitability, and he said that real wage growth "will probably slow significantly." With energy prices at 19-month highs, Bernstein predicts that any cash from refinancing will flow directly into consumers' gas tanks.

TheStreet Recommends

Drew Matus, a financial economist at Lehman Brothers, disagrees. He noted that consumer spending hasn't dropped off so far, and he doesn't believe it is about to any time soon. "It's a mix of things that causes the consumer to lose faith and stop spending money, and I'm not sure we have that confluence of events yet," he said, adding that the employment rate actually has held up well.

Economists said the latest news on economic indicators won't change the

Federal Reserve's

decision on interest rates Tuesday, because the data are really a compilation of statistics that were already available. Most major Wall Street firms expect the Fed to stand pat on rates and maintain its easing bias.

Still, the report was troubling because of the broad-based nature of the declines. Seven of the 10 leading indicators fell in August, and only one indicator -- money supply -- made a significant positive contribution, according to the Conference Board.

Stock prices and the manufacturing workweek also made small positive contributions, while interest rate spreads, initial jobless claims, vendor performance and new orders for nondefense capital goods all declined.

The coincident index rose 0.1%, with three of the four indicators advancing. Only industrial production fell. The lagging index fell 0.1% in August, with five of the seven indicators rising.

"The coincident index shows an economic recovery, but there is a danger that even this weak recovery could stall, especially if the consumer market starts to slow," said Ken Goldstein, an economist at the board.

The last time the index fell for three consecutive months was October through December 2000. The economy proceeded to fall into a recession in March 2001.

"I think it shows some weakness, but I don't have all that much faith in this indicator, and I wouldn't be surprised if it were to be revised up into positive territory next month," Matus said.

Treasury Secretary Paul O'Neill was equally optimistic. In a speech Monday to business leaders and students in Lexington, Ky., he said the U.S. economy is on track to grow at a 3% to 3.5% rate by year-end. He also noted that the latest indicators on housing, business profits and real wages "look good."