Leading index suggests US economy is mending

The Conference Board's economic indicators were positive for the third straight month in June, though recovery may be slow.

Seth Perlman/AP
Construction worker Akram Humaideh begins new home construction Friday in Springfield, Ill. According to the Conference Board, a business research group in New York, future economic activity rose more than expected in June, the third straight monthly increase.

Fresh signs emerged Monday that the US economy may start growing again in the months ahead, despite obstacles posed by a historic financial crisis.

An index of future economic activity rose in June for the third straight month, according to the Conference Board, a business research group in New York. Seven of the 10 forward-looking indicators that make up the group's “leading economic index” showed a positive trend in June. Among the most significant: Stock prices jumped, new claims for unemployment benefits fell, and construction firms began seeking more permits to build new homes.

All this doesn't mean the economy is on the cusp of a vigorous rebound. But they are important signs that a mending process is under way.

Another positive signal came Monday in a survey of business forecasters. They still say that America's gross domestic product will be smaller at year-end than it was in January, but they are no longer downgrading their outlook the way they were at beginning of the year.

“[The] Survey provides new evidence that the U.S. recession is abating, but few signs of an immediate recovery,” said economist Sara Johnson of IHS Global Insight in Lexington, Mass., who released the survey on behalf of the National Association for Business Economics, in a statement.

The abating of the recession is a major step forward, given the fear late last year that the troubles in banking and mortgage markets could lead to a continued downward spiral in the economy. But that still leaves the challenge of how to get the economy growing again at a pace that translates into new jobs.

The Conference Board’s leading index typically foreshadows a recession by turning down, and a recovery by turning up. Many economists say that's exactly what's been happening.

Even as the number of jobs in the economy has been declining, the leading index rose 0.7 percent in June, following gains of 1.3 percent in May and 1 percent in April.

But the combination of a weak banking system and debt-strapped consumers could make the recovery a slow one. After years of expanding their debt, households are feeling pressure to save more.

Forecasters say consumer spending can still grow, but not necessarily at a rapid pace.

“The spending acceleration in 2010 and beyond likely will be mild, as we believe that a sea change in consumer behavior is underway, one involving a slow return to thrift,” writes Richard Berner, an economist at Morgan Stanley, in a recent analysis.

In the survey of business forecasters, nearly half said their company has already seen the low point in revenue for this recession, and all but 14 percent said the low point would come before 2010. Still, 54 percent of respondents indicated that tight credit conditions had a moderate or significant negative impact on their businesses during the second quarter of 2009, up from 45 percent in the first quarter.

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