With war looming in Iraq, anxiety over its outcome showed up in several reports on the U.S. economy Thursday.
The Conference Board said Thursday its Index of Leading Economic Indicators dropped 0.4% in February, the first decline in four months. The index, which is supposed to predict economic activity over the next three to six months, had risen 0.2% in January, revised from an initial 0.1% decline. February's decline was in line with economists' forecasts.
Falling stock prices were the largest negative contributor to the dip, followed by soft labor markets and weak consumer confidence. Experts reiterated that long before the war started, fear of its onset had meaningful consequences.
"In essence, this is a psychological evaluation of what people are expecting for the near future," said Daniel Morgan, market analyst at Noble Financial, a Florida-based money-management firm. "There continues to be a lot of pessimism from the consumer end, which is dragging everything else down."
Of the 10 indicators the Conference Board uses to calculate the index, six were negative, while three were positive. In addition to weakness in consumer confidence, stock prices and in the job market, factory orders for consumer goods and business equipment fell, while homebuilding permits and an increase in money supply helped.
The Conference Board also released its index of coincident indicators, which measures current economic activity. The index was unchanged last month, following a 0.2% rise in January. The index of lagging indicators fell 0.1% in February after a 0.1% increase the previous month.
The Conference Board's report said February's LEI suggests "economic growth may be on the sluggish side in the second quarter." Most economists have reduced their forecasts, but still expect an average 2.2% and 2.8% GDP growth in the first and second quarters, respectively, as reported in the latest Blue Chip Economic Indicators monthly survey.
"The fundamentals point to very good growth in the second quarter, after three consecutive months in which consumers have literally not spent. But it will all hinge on the timeline of this war, on how long it lasts," said Chris Low, chief economist at First Tennessee bank. Consumer spending accounts for two-thirds of the U.S. economy.
Morgan, at Noble Financial, says that "as soon as we get war out of the way, consumers will feel more confident, spending will improve and we'll see growth in the in the medium term."
A separate government report showed the number of workers filing new claims for unemployment benefits remained above the 400,000 level for the fifth consecutive week. Initial jobless claims fell to 421,000 in the week ended March 15, from 425,000 the prior week. Economists had expected the decline to be steeper, reaching 415,000.
Meanwhile, manufacturing in the Philadelphia area had its biggest decline in over a year, as factory orders dried up amid war uncertainty. The Philadelphia Federal Reserve reported its general economic index fell to minus-8.0 in March, from a plus-2.3 the prior month. A negative number indicates most manufacturers surveyed said business worsened during the period. Economists had expected the index to fall to minus-0.4.
Economic weakness was a theme of an address prepared by New York Federal Reserve President William McDonough. "One concern I have is that recovery in the business sector continues to be restrained, not just by geopolitical uncertainty and the need for further restructuring in some key sectors, but by caution on the part of investors and lenders," McDonough said in a speech for the New York State Bankers Association to be given Thursday.