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September witnessed the third month in a row in which the Index of Leading Economic Indicators fell. The well-respected index, published by the Conference Board, fell 0.7 percent, due largely to rising energy costs. Since virtually every product incorporates fuel costs, any such rise will have dampening effect on the nation’s economy.
The September decline of 0.7 percent comes on the heels of a 0.1 percent drop in August and a 0.1 percent fall in July. Historically, economists see three consecutive months of decline in the index as a signal of a significant decline in economic growth and potential recession for the months that follow. “With three negative reports in a row, it’s ugly,” said Chris Low, chief economist at FTN Financial. “What we are seeing is two things: it is the storms and a pre-existing condition that came with the end of auto discounting. Part suppliers and their raw materials suppliers benefited from auto sales incentives.”
Other economist pointed to the seasonal hurricanes that displaced so many workers. David Ressler, Chief economist at Nomura Securities International Inc., said that much of the impact on the latest index came from a rise in jobless claims filed by those workers who were displaced by the storms.
Add the continuing increase in energy prices and economists see yet another reason to expect a slow down in economic activity. Energy prices were rising before Hurricanes Katrina and Rita, but the storms made matters worse by affecting production by shutting down refineries and drilling platforms. The resulting shortages caused prices to rise and deflect consumer spending away from other products, as more of worker’s take-home pay went to purchase gasoline. “The spike in energy prices is another major factor changing the direction of the economy, worsened by a decline in confidence by both consumers and chief executives,” said Conference Board labor economist Ken Goldstein in a statement that accompanied the Conference Board’s report.
Mr. Goldstein also noted: “Add this to the negative impact of the hurricanes and flooding, resulting in lost jobs and incomes, and lost output, and we could be in for slower economic growth through the end of the year.”
Given the many reasons for the recent fall in the Index of Leading Economic Indicators, its historical accuracy as a predictor of economic activity should not be overlooked. Economy watchers are now likely to keep an eye on the Federal Reserve to see whether the Fed gives any indication of slowing down on their deliberate pace of increasing interest rates.