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Signals point to growth, but slower than in 2004

The indicators are up and new jobless claims are down, but the Fed may be cooling things.

NEW YORK - An important gauge of future economic activity rose strongly in June and jobless benefit claims dropped last week by the greatest amount in more than two years, suggesting the U.S. economy is continuing to grow.

But many analysts believe the expansion has begun slowing from last year's torrid pace in response to Federal Reserve hikes in U.S. interest rates.

The Conference Board said Thursday that its Composite Index of Leading Economic Indicators increased 0.9 percent in June to 137.7 after showing no change the month before and a 0.2 percent rise in April.

The June increase was the largest since a 0.9 percent rise in December 2003, the board said.

The index is watched closely because it is designed to predict economic activity over the next three to six months.

In Washington, meanwhile, the Labor Department reported the number of Americans filing new claims for unemployment benefits plunged last week by the largest amount in 21/2 years. The department said new benefit claims dropped 34,000 to 303,000 as the labor market continued to strengthen.

Government analysts attributed the improvement to a slowdown in layoffs in the auto industry, which had seen big increases in recent weeks as auto plants shut down temporarily to retool for the new model year.

The drop of 34,000 was the largest one-week improvement since a decline of 35,000 in the week of Dec. 21, 2002. The decline was more than triple the 10,000 drop that private analysts had been predicting.

Economists said the latest statistics show the economic expansion is continuing, though probably at a slower rate than last year.

Anthony Chan, managing director and senior economist at JPMorgan Fleming Asset Management in Columbus, Ohio, said the leading index performance in June was solid, with broad-based gains in most of its 10 components, including consumer sentiment.

"It tells us that the economic expansion is probably on track," Chan said.

At the same time, he said, the economy's growth rate appears to be slowing from its 4.4 percent expansion in 2004. He predicted the economy would grow 3.5 percent this year and about 3.25 percent in 2006.

Chan said the Federal Reserve rate increases were designed to do that and added: "We're on track, moving toward a mission-accomplished point." The Fed has raised rates nine times in the past year and is expected to increase them again at its August meeting.

The leading index figures were based on revised calculations. The last time the gauge underwent a major revision was in 1996, shortly after the Conference Board, an industry-backed research group in New York, took over calculating the index from the Commerce Department in Washington.

Without the revisions, the index of leading indicators would have shown an increase of 0.5 percent in June after a dip of 0.2 percent in May, the Conference Board said.

The board said the revised index has increased at a 1.2 percent annual rate over the past six months, down from a peak of about 10 percent at the end of 2003.

Gail Fosler, the board's chief economist, said this is consistent with weaker economic growth.

"We believe the industrial economy is slowing down, that it is slowing down quite quickly," Fosler said. She added, however, that she did not believe a recession was in the offing, saying, "We are way far away from anything that looks like a recession signal."

Mark Vitner, senior economist at Wachovia Securities in Charlotte, N.C., also said the economy was slowing.

"The stimulus from the tax cuts and low interest rates in place in 2003 have played out," Vitner said. "Now the economy is returning to a more sustainable growth rate."

[Last modified July 22, 2005, 00:32:15]