Leading Economic Index Dips Again as Recovery Weakens

The Leading Economic Index declined 0.2% in June, and a closer look at its components suggests that the current slowdown in U.S. economic growth will continue into the fall. The consensus prediction of economists surveyed by Bloomberg had been for the LEI to fall 0.2% in June after its 0.5% rise in May and 0.1% decline in April. The LEI index now stands at 109.8.

Excluding the interest rate spread component, which has boosted the index almost since the recovery began, the LEI would have fallen 0.6% in June. The factory workweek, index of supplier deliveries, and manufacturers' new orders components of the index all fell. In addition, the weekly initial jobless claims component rose -- something that's also a negative contributor to the index.

"The indicators point to slower growth through the fall," Ken Goldstein, economist for The Conference Board said in a statement. "Two trends will have a direct impact on the pace of economic expansion. First, improvement in the industrial core of the economy will moderate as inventory rebuilding slows. Second, improvement in the service sector has been relatively slow, with little indication that it will pick up momentum."

What's more, as a result of June's decline, the six-month change in the index has moderated to a 2.6% increase through June 2010, down from a 5.6% rise in the previous six months.

Slower Growth, Not a Double-Dip Recession

The June LEI, when combined with the latest data on jobless claims, home sales and industrial production, provides more statistical support for U.S. Federal Reserve Chairman Ben Bernanke's evaluation that the U.S. economic outlook is "unusually uncertain," -- despite indications that the world's largest economy is still recovering.

The Fed chairman added that the central bank remains prepared to take additional action either if the U.S. economy slows substantially or if it accelerates too quickly and raises the specter of inflation.

To be sure, the preponderance of data doesn't indicate that the economy has fallen into a dreaded double-dip recession. Rather, it indicates that the economy will continue to expand, but a slower pace, at least through the third quarter, and that the breadth of the recovery will likely be uneven.

Even before the recent slowdown in the recovery, the nation wasn't creating enough jobs to substantially reduce the U.S. unemployment rate. An even slower GDP growth rate -- which the LEI is pointing to -- likely would further delay employment gains, or even cause unemployment to rise. That scenario would undoubtedly prompt additional public policy action -- something that Chairman Bernanke underscored in his Capitol Hill testimony Wednesday.