3 reports deliver bad news on trade, prices, growth

Leading indicators index suggests a slower pace

February 21, 2003|By BLOOMBERG NEWS

WASHINGTON - The Index of Leading Economic Indicators fell in January for the first time in four months, which may suggest a slower pace of growth in coming months as the threat of war in Iraq intensifies.

A 0.1 percent decline in the Conference Board's gauge of the performance of the economy over the next three to six months followed a 0.2 percent rise in December and a 0.5 percent gain in November. It was the first decline since a 0.5 percent drop in September.

"The weakening trend in the LEI index points to weaker manufacturing activity in the months to come," said Kenneth Kim, an economist at Stone & McCarthy Research Associates in Princeton, N.J.

Economists had projected no change in the leading indicators index.

In other economic news, the U.S. trade deficit unexpectedly widened to a record in December, and wholesale prices staged their biggest gain since 1990 in January as the specter of war pushed up oil costs.

Half of the 10 indicators the Conference Board uses to calculate the index were positive.

The New York group bases its index on seven previously reported economic statistics and estimates for three other statistics.

Positive effects on the overall index came from a decline in unemployment claims, slower vendor delivery times (implying rising demand), a wider spread between the yield on the 10-year Treasury note and the overnight bank lending rate, and more orders for consumer goods.

Negative factors were a drop in consumer expectations over the next five years, a shorter factory work week than in December, reduced orders for capital goods, a decline in stock prices and fewer building permits.

The Conference Board's index of coincident indicators, a gauge of current economic activity, rose 0.2 percent in January after no change in December.

The Conference Board corrected its leading economic indicators figure yesterday after reporting earlier that the gauge was unchanged in January.

Stone & McCarthy's Kim said the Conference Board had incorrectly used unrevised vendor delivery times statistics in calculating the index, making it look stronger than previously reported.

The economy will probably expand 2.7 percent this year, according to the February Blue Chip's consensus of 53 economists. Gross domestic product grew 2.4 percent in 2002. The forecasters say the economy will probably accelerate to a 3.8 percent rate in the year's final three months.

The leading indicator "is consistent with first-quarter growth of about 3 percent, but further progress is going to require a resolution to the Iraq situation," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, N.Y.

In another report yesterday, the Commerce Department said the U.S. trade deficit unexpectedly widened to a record in December. Exports declined.

The $44.2 billion trade gap in goods and services surpassed the previous record of $40 billion in November, the Commerce Department said. For all of 2002, the deficit reached $435.2 billion, the highest ever, compared with the previous high of $378.7 billion in 2000.

The U.S. economy, the world's largest, is stronger than its counterparts, suggesting that domestic demand will be met by more imports at the same time exports languish. Rising imports and less demand abroad for U.S. goods can keep the economy from growing faster.

Economists had expected a deficit of $38.7 billion compared with November's previously reported $40.1 billion gap.

In addition, wholesale prices staged their biggest gain since 1990 in January as the specter of war pushed up oil costs, the Labor Department said. Slower manufacturing this month and an increase in unemployment claims added to evidence that companies are in no hurry to buy equipment and add jobs this year.

A sustained rise in wholesale prices may squeeze corporate margins and renew pressure on companies to try to raise the prices of their final goods and services. So far, price-sensitive consumers have foiled attempts by automakers, chemical companies and other producers to pass on price increases.

The Dow Jones industrial average closed down 85.64 points, or 1.1 percent, at 7,914.96, and the Nasdaq composite index declined 3.09 to 1,331.23.

Excluding food and energy, the Labor Department's so-called core index of wholesale prices increased 0.9 percent in January after a 0.5 percent decrease. Core prices minus new vehicles rose 0.3 percent. Economists had expected a 0.5 percent rise in producer prices and a 0.1 percent increase in the core.

The jump in the core rate was the biggest since a 1 percent rise in December 1998. It suggested that some companies are beginning to find room to raise prices in the face of competition and weak demand.

Producer prices rose 1.6 percent in January after falling 0.1 percent the previous month, the Labor Department said. The number of workers seeking initial unemployment benefits rose to a seven-week high of 402,000 last week, the department said in a separate report.

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