Leading Indicators, Philly Fed Survey Suggest Slowing U.S. Growth


The Conference Board's Leading Economic Index rose 0.4% to 109.9 in May, while the Philadelphia Federal Reserve index, known as the Philly Fed Survey, plunged to 8 in June from 21.4 in May, sending out conflicting signals about the direction of the U.S. economy.

The LEI has been on the rise since April 2009, and continued inching up in May. However, the six-month change in the index has moderated to 3.9% through May 2010, down from 5.2% in the previous six months.

The most worrisome aspect of the LEI may have been the comments of Bart van Ark, chief economist for the Conference Board, who sees debt adding to the headwinds against growth in the U.S. and Europe. "The index points to continued, though slower, U.S. growth for the rest of this year," van Ark said, in a statement. "Public debt and deficits weigh heavily on growth prospects on both sides of the Atlantic. We project a serious slowdown in European growth in 2011, which could further weaken the U.S. outlook."

Conflicting Data and a Persistent Problem

Perhaps as a harbinger, the Philly Fed index, which had edged higher for four straight months, plunged 13.4 points to 8 in June -- its lowest reading in 10 months.

Two of the survey's components provided conflicting data regarding the economy. The new-order component rose 3 points, but the shipments component fell 2 points.

A persistent problem area for the U.S. economy showed up in the latest Philly Fed report -- demand for labor. The employment component fell to -1.5 from +3.2. Until this month, companies' responses had suggested that labor market conditions were improving, but components for current employment and work hours were both slightly negative in June, the Philadelphia Fed said.

Taken together, both the LEI and Philly Fed survey confirmed that the U.S. economy continues to grow, but the pair also highlighted the danger signals that are currently flashing.

Given that the U.S.'s 3% GDP growth rate in the first quarter did not generate enough jobs to substantially decrease the nation's unemployment rate, an even-slower GDP growth rate would further delay employment gains and perhaps cause the unemployment rate to start rising again. That scenario would undoubtedly prompt additional public policy action.