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ECONOMY // Signs of strength on horizon

Published Jun. 20, 2006

The Conference Board said its Index of Leading Economic Indicators, a gauge of how the economy will perform in the next three to six months, increased 0.4 percent in July for the fourth straight rise, one of several signals announced Thursday that U.S. economic growth is picking up.

New claims for unemployment benefits dropped by 17,000 to 386,000, the Labor Department said in Washington. And the Federal Reserve Bank of Philadelphia said its general economic index rose to 22.1 from 8.3 last month. Numbers above zero mean a higher percentage of manufacturers said business was improving rather than eroding.

Stocks ended the day higher following release of the two reports. The Dow Jones industrial average closed up 26.17 points at 9,423.68, while the Nasdaq advanced 17.01 to 1,777.55. The Standard & Poor's 500 index rose 2.97 to 1,003.27.

An economy poised to accelerate may be making companies reluctant to fire workers after the elimination of 1-million jobs since the recovery began in November 2001. If increased sales at a variety of retailers are any indication, hiring may pick up in coming months, economists said.

"We are definitely heading into a considerably stronger second half," said Jan Hatzius, a senior economist at Goldman Sachs & Co. in New York. The figures "are consistent with an economy that is gaining momentum."

Economists had expected the Philadelphia bank's index to rise to 10, the median of 48 forecasts in a Bloomberg News survey.

"The key drivers behind the August strength were exactly where we would want to see them, new orders and shipments, with each jumping to their highest levels in seven months," said Mat Johnson, an economist at Quantit Economic Group in Sausalito, Calif. The Philadelphia reading created "solidly higher expectations" for other factory reports this month, he said.

Initial jobless claims were the lowest since the week ended Feb. 8, the Labor Department said. Economists had forecast a decline to 395,000 from the previously reported 398,000. The four-week moving average, a less volatile measure, dropped to 394,250 from 395,500. Some economists consider 400,000 the dividing line between a strong and weak labor market.

The claims numbers are "a sign of stabilization in the labor market," Ethan Harris, chief economist at Lehman Brothers Inc. in New York, said. "As the year unfolds, we'll get some growth in jobs as corporations become a little more confident about the recovery."

Harris and other economists said they were skeptical of the department's claim that last week's power failure in eight states in the Northwest and Midwest didn't artificially lower claims by keeping fired workers from filing applications.

The main effect of the blackout was to lower claims by 2,000 to 3,000 from one state, said department spokesman Tom Stengle, who declined to say which state. Economists had predicted the power failure might keep as many as 15,000 fired workers from filing applications, and some were skeptical that Thursday's numbers weren't affected more.

"We find it difficult to believe, as nearly one-quarter of the country was unable to file for unemployment insurance for one-fifth of the work week," said Drew Matus, senior U.S. economist with Lehman Brothers Inc.

Continuing claims rose by 41,000 in the week ended Aug. 9 to 3.673-million. The figure has averaged about 3.6-million this year, or 1.2-million more than the average from 1994 through 2002. The insured employment rate, which tends to track the U.S. jobless rate, was unchanged at 2.9 percent.

The decline in jobless claims in July helped push up the Index of Leading Economic Indicators. The last time the measure increased in four consecutive months was October 2001 through January 2002.

"After 2 percent growth in the first half of the year, the indication is that growth could be as much as twice as fast before the year is out," said Ken Goldstein, an economist at Conference Board.

Half of the 10 indicators the Conference Board uses to build the gauge contributed to the increase. Besides a decline in initial jobless claims, a greater supply of money, an increase in the Standard & Poor's 500 Index, a wider yield spread between the federal funds rate and the 10-year Treasury note and a slower pace of deliveries also contributed to the July gain.

The U.S. economy will need "more than a few quarters" of strong growth to reduce unemployment and excess capacity, so Federal Reserve policy makers may leave interest rates at 45-year lows to boost growth and ward off deflation, said Robert Parry, president of the San Francisco Fed Bank.

In a speech in San Diego, Parry said the moderate pace of recovery so far means a decline in the rate of inflation remains a risk. The Fed voted in June to reduce the target interest rate on overnight loans to a 45-year low of 1 percent even as central bank economists were becoming more optimistic about growth.