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Economic reports hint at bumpy road

A key gauge of U.S. economic activity held steady in February following four straight months of gains, suggesting a rocky economic recovery in the months ahead, a private research firm said Thursday.

The Conference Board reported its Index of Leading Economic Indicators was unchanged at 112.4 last month following a revised 0.8 percent increase in January. Analysts had forecast a 0.1 percent gain.

"The U.S. economy has quickly turned from recession and is now firmly in recovery," Conference Board economist Ken Goldstein said. "But the road ahead is far from smooth, with sluggish profits and weak export demand restraining growth."

Goldstein said additional shifts in indicator growth are possible in the months ahead. But he said they would indicate a slowing in recovery rather than an end of it.

The report coincided with the release of another report by the Labor Department on Thursday showing new claims for unemployment insurance falling by a seasonally adjusted 12,000 last week to 371,000, the lowest level in a month. Also, a closely watched gauge of inflation, the Consumer Price Index, edged up 0.2 percent in February, reflecting higher prices for clothing and medical care, further signs the economy is staging a comeback.

The leading indicators index measures where the overall U.S. economy is headed in the next three to six months. It stood at 100 in 1996, its base year.

Economists said they were not worried about February's flat performance in light of strong gains in previous months. The index rose 0.8 percent in November and 1.3 percent in December following the Sept. 11 attacks.

"The economy is recovering but is still fragile," said Mark Zandi, chief economist at in Westchester, Pa. "I think when you look through the ups and downs in the data, you'll see a general upward trend. Those trends should be reinforced as the year progresses."

On Wall Street, blue-chip stocks lost ground on concerns about higher interest rates. The Dow Jones Industrial Average fell 21.73 points to close at 10,479.84.

In the inflation report, introduction of higher-priced spring and summer wear lifted clothing prices 0.5 percent in February, the biggest increase in a year. Clothing prices had fallen in each of the preceding three months as retailers slashed prices to get rid of merchandise. Economists predicted spring and summer sales will lead to lower apparel prices in coming months.

"The deepest of the deep discounts for a lot of goods is probably behind us, but there are still bargains to be had," said Stuart Hoffman, chief economist at PNC Financial Services Group.

But there's little relief in sight for consumers when it comes to health care costs, economists said. Prices for medical care went up 0.3 percent in February, boosted by increases in prescription drug prices and hospital charges. Medical care costs are running 4.5 percent higher than a year ago.

Airline fares, meanwhile, rose 1 percent in February, the largest increase since June. It was the second straight month that airline ticket prices went up and came after a six-month string of price declines.

Food prices increased 0.2 percent, following a 0.3 percent rise. But energy prices, including gasoline, dropped 0.8 percent in February, following a 0.9 percent advance the month before. In recent weeks, gasoline prices have jumped sharply as crude-oil prices hit a six-month high.

Excluding energy and food prices, the "core" rate of inflation rose 0.3 percent in February, led by a jump in the price of tobacco products.

After slashing short-term interest rates 11 times last year to rescue the economy from recession, the Federal Reserve decided Tuesday to leave rates unchanged, just as it did in January. But Fed policymakers, pointing to the strength of the economic rebound, opted to shift their policy directive, a sign of future moves.

The Fed moved from a stance that focused on combatting the recession through lower interest rates to a so-called neutral policy, in which the risks of inflation and economic weakness are equally balanced.

Economists viewed that change as preparing Americans for the possibility of higher rates this year. Some analysts think the Fed will begin to raise rates as soon as its next meeting, May 7, or in June.

With the economy bouncing back from a recession and interest rates at their lowest level in four decades, a few economists worry that inflation could worsen. That's another reason for the Fed to act sooner rather than later, they said.

"My best guess is that the Fed will start to raise rates, but cautiously," said Oscar Gonzalez, economist with John Hancock. "I wouldn't even be surprised to see a small, almost token, move soon, as early as the next meeting. Call it a warning shot at inflation."