Sept. 18 (Bloomberg) -- The U.S. economy was heading for a deeper slowdown than forecast even before this month's collapse in financial markets, a gauge of its future performance showed.

The Conference Board's index of leading indicators, which points to the direction of the economy over the next three to six months, fell 0.5 percent. Separately, the Labor Department reported that more Americans than forecast filed first-time claims for unemployment insurance last week because of the impact of Hurricane Gustav in Louisiana.

The August leading indicators figure was propped up by gains in the stock market that have since evaporated after the failure of Lehman Brothers Holdings Inc. and takeover of American International Group Inc. this week.

``The Wall Street crunch has definitely rolled over into Main Street,'' said Lindsey Piegza, a market analyst at FTN Financial, which correctly forecast the decline in leading indicators. ``It's a very dismal picture all around.''

Stocks rose and Treasuries fell today after the world's biggest central banks planned to pump $247 billion into the financial system to combat the deepening crisis and on prospects the government will formulate a plan to shore up financial markets.

The Standard & Poor's 500 Stock Index gained 4.3 percent to close at 1,206.51. Yields on benchmark 10-year Treasuries rose to 3.54 percent at 4:35 p.m. in New York, from 3.42 percent late yesterday.

Financial Carnage

Stock indexes hit their lowest levels in three years yesterday. In the past 11 days, the government took over mortgage-finance companies Fannie Mae and Freddie Mac and insurer American International Group Inc. Lehman Brothers Holdings Inc. filed for bankruptcy and Merrill Lynch & Co. was rushed into a merger with Bank of America Corp.

The turmoil has sent investors scurrying to Treasuries, causing one money-market fund's net asset value to drop below $1 for the first time in 14 years.

A separate report today showed manufacturing in the Philadelphia region unexpectedly expanded in September. The Federal Reserve Bank of Philadelphia's general economic index increased to 3.8 this month from minus 12.7 in August. Positive readings signal growth.

``If economic conditions weaken further, as the index of leading indicators suggests, then the rebound in the Philly Fed index will almost certainly prove to be a false start,'' said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York.

Annual Drop

The leading-indicator index fell at a 2.1 percent annual pace over the past six months. A decline of around 4 percent to 4.5 percent at an annual pace is one signal a recession is imminent, according to the Conference Board. The gauge met that requirement in January, when it dropped at a 4.7 percent pace.

The New York-based private research group's leading index was forecast to decline 0.2 percent, according to the median of 57 economists in a Bloomberg News survey.

``The economy right now is so slow that it doesn't have much cushion for shocks,'' Ken Goldstein, an economist at the Conference Board, said in a statement. ``We may not see any signs of improvement until well into the second half of 2009.''

Six of the 10 indicators in today's report subtracted from the index, led by faster supplier deliveries to factories that signal fewer orders are coming in. A slump in building permits and a jump in first-time jobless claims also factored into the decline.

Jobless Claims

The Labor Department reported initial jobless claims last week rose 10,000 to 455,000, led by a jump in Louisiana reflecting job losses in the wake of Hurricane Gustav. While the Labor Department said claims would have fallen excluding the state, the overall trend in applications still points to deterioration in the labor market, economists said.

Economists surveyed by Bloomberg in the first week of September anticipated the longest expansion in consumer spending on record will come to an end this quarter. Purchases will probably stall, according to the survey median, the weakest reading since the last three months of 1991.

The housing slump is deepening, threatening the financial system and leading to this week's government takeover of AIG and Lehman's bankruptcy.

Building permits, a sign of future construction, fell 8.9 percent in August, while work began on the fewest houses in 17 years, the Commerce Department reported yesterday.

Unemployment Rate

The economy has lost 605,000 jobs so far this year and the jobless rate reached a five-year high of 6.1 percent in August.

More dismissals may be on the way. Chrysler LLC's Chief Executive Officer Bob Nardelli said the automaker may need to cut more jobs and trim other costs should U.S. lawmakers fail to approve $25 billion in loans to help the industry develop fuel- efficient vehicles.

Nardelli said he hadn't ``seen any signs'' of a U.S. economic recovery, during a Sept. 12 interview. ``It's critically important that we get this economy re-fired, that we get the energy back into this economy, that we get consumer confidence back,'' he said.

Higher stock prices in August prevented the leading index from dropping even more, an underpinning unlikely to be repeated this month, economists said. The Standard & Poor's 500 index averaged 1234.96 in the first 17 days of September, down from 1281.47 in August.

The index of coincident indicators, a gauge of current economic activity, fell 0.1 percent after no change in July.

The index tracks payrolls, incomes, sales and production, which, combined with gross domestic product, are the figures used by the National Bureau of Economic Research to determine whether a recession has begun.

The gauge of lagging indicators increased 0.4 percent for a second month. The index measures business lending, length of unemployment, service prices and ratios of labor costs, inventories and consumer credit.

To contact the reporter on this story: Bob Willis in Washington bwillis@bloomberg.net

Last Updated: September 18, 2008 16:40 EDT