A key forecasting indicator for the U.S. economy fell in April for the first time since September, another sign that the economic recovery is a mild one.
The Conference Board said Monday that its index of leading economic indicators fell 0.4 percent in April, after a 0.1 percent increase in March. Analysts had forecast a more modest decrease.
“It was a little bit worse than expected,” said David Wyss, Standard & Poor’s chief economist. “After a great start at the beginning of the year, things are starting to slow down.”
The April numbers mark the the first decline since a 0.6 percent drop in September.
Economists said the decline in the leading indicators does not signal a reversal of the recovery, and downplayed the danger of that scenario. But the report does hint at continued underlying weaknesses that could temper the pace of growth, they said. They also noted, however, that the index can be volatile because it includes a broad spectrum of indicators.
Five of the 10 components that make up the leading indicators index fell in April, led by money supply and stock prices.
Positive contributors in April were manufacturers’ new orders, vendor performance and building permits.
“It’s not unusual for this index to decline in a given month now and then,” said Gary Thayer, chief economist at A.G. Edwards & Sons Inc. “The thing to watch is the trend, and that has been moving upward and it suggests the economy is still headed for further recovery.”
Many economists expect the May report to show a return of the indicators index to positive territory.
Mark Vitner, vice president and senior economist at Wachovia Securities, said encouraging signs already exist. He expects the manufacturing sector to gain momentum over the next six months.
But Wyss isn’t ruling out the possibility of a second downturn in a “double-dip” recession.
“I’m concerned of a second dip … very concerned. You have to be,” but for reasons that would not show up as clearly in economic indicators, Wyss said. “It’s going to be because of a terrorist attack or oil prices going to $70.”
On Wall Street, the markets were lower Monday, with the Dow Jones industrial average tumbling 123.58, or 1.2 percent, to 10,229.50. Among other things, stock market watchers attributed the drop to profit-taking after last week’s gains, the weekend attacks in the Middle East, and Vice President Dick Cheney’s comments concerning future terrorist attacks in the U.S.
“Clearly the market’s nervous that the economy is slowing down faster than they thought, and that earnings in particular are just not picking up the way some people expected them to,” Wyss said.
While growth in the gross domestic product–measuring the output of goods and services produced in the country–was a hefty 5.8 percent in the first quarter, GDP growth in the second quarter is expected to be smaller. Much of the first-quarter gains were attributed to an upswing in the inventory cycle–or businesses starting to replenish inventories to more normal levels after allowing them to be depleted in the fourth quarter last year.
Indeed, “the recovery in the industrial core remains weak,” said Conference Board economist Ken Goldstein. In addition to job losses, high energy prices and a slow investment sector continue to dampen growth of the economy, he said.
Looking forward, unemployment could continue to be a drag, observers said.
“There just aren’t a whole lot of jobs being created now,” Vitner said. That problem could be compounded in May and June, when more college graduates enter the job market and could push up the unemployment rate.
“We probably have to see a bit of an improvement in the unemployment rate before the Fed makes a move, and that could be several months,” Thayer said.
Many economists believe the decline in the leading indicators index supports the notion that the Federal Reserve will not raise interest rates until September.
