Leading Indicators, Philly Fed Survey Confirm Slowing U.S. Recovery

Leading Economic Indicators, Philly Fed Survey drop
Leading Economic Indicators, Philly Fed Survey drop

A pair of economic indexes released Thursday further confirmed that the U.S. economic recovery slowed this summer: The Conference Board's Leading Economic Index rose 0.1% in July to 109.8, but that gain was offset by a revised larger decline for June, to minus 0.3% from minus 0.2%, and by the drop in the Philadelphia Federal Reserve Index, which plunged to minus 7.7 in August from 5.1 in July.

Economists surveyed by Bloomberg had predicted the LEI would rise 0.1% in July and the Philadelphia Index would rise to 7 in August. Philadelphia Index readings above zero indicate an expansion; below zero, a contraction.

Ken Goldstein, economist for The Conference Board, said the good news in the LEI is that the latest numbers don't indicate a double-dip recession is ahead. The bad news is, as inventory rebuilding has cooled, no other growth engine has emerged to increase U.S. GDP growth.

"The indicators point to a slow expansion through the end of the year," Goldstein said in a statement. "With inventory rebuilding moderating, the industrial core of the economy has moved to a slower pace. There appears to be no change in the pace of the service sector. Combined, the result is a weak economy with little forward momentum. However, the good news is that the data do not point to a recession."

Although the LEI has been rising since April 2009, the six-month change in the index has moderated to a 2% increase through June 2010, down from a 5% rise in the previous six months.

Philly Fed Index Goes Negative

The Philly Fed index in August provided perhaps the most compelling evidence to date that the U.S. economic expansion cooled this summer. Key components measuring new orders, unfilled orders and prices received all fell into the negative category, which indicated a contraction in business activity. Companies in the survey also reported declines in employment and hours worked.

Taken together, both the LEI and Philly Fed survey confirm that the economy continued to grow this summer, but at a slower pace and with troubling signs -- particularly for job growth -- for the immediate quarters ahead.

Institutional investors won't like the recent retreats in both indexes. Those declines indicate that the U.S. recovery, which was not robust enough to substantially lower the unemployment rate prior to summer, is now growing at an even slower pace -- making a reduction in the jobless rate even less likely.

Should the slow-growth economy persist into the fall, that would likely weigh on corporate revenue and earnings -- something that historically has been bad news for the U.S. stock market -- and may also push the unemployment rate above 10%, which may prompt additional action by Congress.