Economic Future Looking Brighter?

AP Image Ingested via Automated Feed
AP
A widely watched measure of future economic activity rose in October, signaling that the U.S. economy will grow this year — but at a more moderate pace than in 2004 — despite being battered by hurricanes in September.

Some of that moderation may be due to a slowdown in the real estate market, which was a major booster of overall economic growth.

The Conference Board said that its Index of Leading Economic Indicators, which tries to gauge future economic growth, rose 0.9 percent in October, offsetting a notable drop in September largely tied to hurricanes Katrina and Rita that swamped U.S. Gulf states and hit hard the heart of the nation's oil refining industry.

The Conference Board's coincident index — a measure of current economic activity — rose 0.1 percent.

The Conference Board said October's increase showed gains across many different businesses, except housing.

The largest positive contributors to the leading index were initial claims for unemployment insurance, which fell after being driven higher by the hurricanes, and average weekly hours in manufacturing which also had been thrown off in September by disruptions tied to the storms.

The largest negative contributors were a decline in housing permits and a drop in stock prices. The index of consumer expectations held steady.

The leading index has slowed steadily since mid-2004. It grew almost at a 1 percent annual rate since January, compared with a roughly 4 percent expansion rate in the same period in 2004.

The index has remained relatively unchanged for most of the year and is now essentially at the same level as mid-2005. According to the Conference Board, the index's recent behavior remains consistent with the economy continuing to expand more moderately in the near term.

"It is definitely clear that (housing) is one area where you will see less growth," said Stephen Stanley, chief economist at RBS Greenwich Capital Markets. "It goes from being a positive to a neutral in terms of what it means for the leading index" and overall economic activity, he said.

Stanley added that much of what goes on in real estate will hinge on interest rates, which determine borrowing costs for home buyers and more specifically growth in jobs and wages that shape home buying decisions. The Federal Reserve has been raising interest rates, tightening credit policy to choke off inflation.

Gerald Zukowski, deputy chief economist at Nomura Securities International Inc. said "the decline in permits is more indicative of the longer trend. The permits component is indicating that this boost to the economy will subside in upcoming quarters."

Zukowksi pointed to recent data from homebuilders and lenders as evidence of a slowdown in home sales activity.

Last week, the Mortgage Bankers Association's gauge of demand for home loan refinancings fell to lows not seen since December 2004 and The National Association of Home Builders' survey of sentiment among housing contractors dropped to its lowest since April 2003 amid diminished expectations for home sales in coming months.