U.S. Leading Economic Indicators Index Increased 1.2% in May

The index of U.S. leading economic indicators rose more than forecast in May for the second straight month, reinforcing signs that the worst recession in five decades may end this year.

The Conference Board’s gauge increased 1.2 percent after a revised 1.1 percent in April, the biggest back-to-back gain since November-December 2001, according to data the New York- based group released today. The index points to the direction of the economy over the next three to six months.

The gains in stock prices, consumer confidence and building permits that are propelling the leading index higher bolster forecasts the economy will start growing again in the second half of 2009. Still, mounting unemployment and tight credit mean the recovery will be slow.

“The economy is working through the crisis, laying the groundwork for recovery,” John Herrmann, president of Herrmann Forecasting in Summit, New Jersey, said before the report.

The index was forecast to rise 1 percent, according to the median of 55 economists in a Bloomberg News survey, after an originally reported increase of 1 percent in April. Estimates ranged from a decline of 0.5 percent to a gain of 1.8 percent.

The Conference Board’s index of coincident indicators, a gauge of current economic activity, fell 0.2 percent, the smallest drop since October, after decreasing 0.3 percent the prior month. The index tracks payrolls, incomes, sales and production.

Lagging Indicators

The gauge of lagging indicators fell 0.2 percent following a 0.8 percent decline in the prior month. The index measures business lending, length of unemployment, service prices and ratios of labor costs, inventories and consumer credit.

Seven of the 10 indicators in today’s report added to the index, led by a measure of supplier delivery times which indicates orders are picking up. That added 0.33 percentage point.

Another 0.24 point boost was provided by the Standard & Poor’s 500 Stock Index, which gained 6.4 percent in May from the prior month’s average.

A 0.18 point contribution came from a jump in the Reuters/University of Michigan index of consumer expectations, a proxy for future spending. A preliminary report for June, meanwhile, showed that gauge fell this month.

Seven of the 10 indicators for the leading index are known ahead of time: stock prices, jobless claims, building permits, consumer expectations, the yield curve, factory hours and supplier delivery times.

The Conference Board estimates new orders for consumer goods, bookings for capital goods, and the money supply adjusted for inflation.

Money Supply

Money supply adjusted for inflation, which has the biggest weighting in the index, added 0.24 point, and interest-rate spreads added 0.31 point.

Building permits, a sign of future construction, added 0.11 point. Permits rose 4 percent to a higher-than-forecast 518,000 pace in May from a 498,000 rate in April, government figures showed this week.

A shorter factory workweek, new orders for consumer goods and jobless claims subtracted from the index.

A Labor Department report today showed initial jobless claims rose by 3,000 to 608,000 last week. The number of people on benefit rolls dropped for the first time since January, adding to evidence the job market is starting to thaw.

The bankruptcies of automakers General Motors Corp. and Chrysler LLC, as well as parts-makers Visteon Corp. and Metaldyne Inc., may cause more job losses and prolong the downturn in manufacturing. The unemployment rate will touch 10 percent by year-end, according to a Bloomberg survey this month.

Still, some manufacturers are seeing a turnaround.

While the outlook for business jets remains weak amid the slump, officials at Honeywell International Inc., the world’s largest maker of airplane controls, detect signs of a recovery in some aerospace markets.

“If we’re looking for ‘green shoots,’ there are some out there,” Chief Executive Officer David Cote said this week in a Bloomberg Television interview from Paris.