Dec. 18 (Bloomberg) -- A gauge of the economy’s future performance posted its biggest annual drop since 1991 in November as the declines in housing and job markets accelerated, showing little sign the U.S. contraction will ease in early 2009.

The Conference Board’s index of leading indicators dropped 0.4 percent from October, and 3.7 percent from a year before. Other reports showed first-time claims for unemployment benefits held close to a 26-year high and manufacturing in the Philadelphia region contracted for the 11th time this year.

The drop in the leading index underscores economists’ projections that the recession will be the longest in the postwar era as banks restrict credit, home and stock values plunge and job losses mount. President-elect Barack Obama reiterated today that his top priority is a stimulus plan that spurs demand and creates new jobs.

“There is no end to the recession in sight,” said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh, who correctly forecast the decline in the leading index. “The economy is likely to continue to fall hard.”

Treasury securities maintained gains following the reports as concern over the deepening economic slump persuaded investors to accept almost record-low yields to safeguard their money. Yields on benchmark 10-year notes fell to 2.08 percent at 4:19 p.m. in New York. The dollar rose 1.4 percent to $1.4217 per euro. The Standard & Poor’s 500 Stock Index fell 2.1 percent to close at 885.34.

Jobless Claims

The number of Americans filing first-time applications for unemployment benefits dropped by 21,000 to 554,000 in the week that ended Dec. 13, from a 26-year high of 575,000 the prior week, the Labor Department said today.

“This is exactly the stage of the recession where businesses are aggressively cutting employment,” Mickey Levy, chief economist at Bank of America Corp. in New York, said in a Bloomberg Television interview. “I expect the pace of layoffs to continue.”

The Philadelphia Federal Reserve Bank’s manufacturing index registered a reading of minus 32.9 this month, higher than anticipated, compared with minus 39.3 in November. Negative readings signal contraction.

Economists projected the leading index would drop 0.4 percent, according to the median of 55 forecasts in a Bloomberg News survey. The measure has fallen in five of the past seven months.

Six of the 10 leading indicators subtracted from the index, led by a slump in building permits, plunging stock prices and increasing jobless claims.

Housing Rout

The drop in building permits to a record low last month subtracted almost a half point from the leading index.

The other negative categories included a decline in the factory work week, a drop in consumer expectations and shorter supplier delivery times that indicate a drop in orders.

A surge in the money supply adjusted for inflation, which has the biggest weighting in the index, prevented the gauge from falling even more. The measure added 0.6 percentage point.

The economy entered a recession in December 2007, the National Bureau of Economic Research announced Dec. 1. Economists surveyed by Bloomberg this month forecast continued contraction in the first half of 2009, making this the longest slump since the end of World War II.

The Conference Board’s index of coincident indicators, a gauge of current economic activity, fell 0.3 percent, after increasing 0.3 percent the prior month. The index tracks payrolls, incomes, sales and production, the figures used by the NBER to determine the start of recessions.

2007 Peak

The coincident index peaked in October 2007, two months ahead of the start of the downturn.

Obama may ask Congress next year to approve a stimulus plan of around $850 billion, according to a transition adviser. The amount would exceed initial estimates by House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, as well as surpassing what some economists and the International Monetary Fund say is required.

Fed policy makers on Dec. 16 said they will target a federal funds rate of between zero and 0.25 percent and buy unlimited quantities of debt as the next step in combating the recession.

“The outlook for economic activity has weakened further,” the Fed said in a statement. The central bank said it “will employ all available tools” to revive growth and preserve price stability.

AutoNation Pain

Mike Jackson, chief executive officer of AutoNation Inc., the largest publicly traded U.S. car retailer, said sales have declined “practically to a standstill” because lenders are retrenching.

“The credit is simply not there from the financial institutions to finance those customers: they’re turning away very good customers,” Jackson said in a Bloomberg Radio interview on Dec. 4.

The Conference Board’s gauge of lagging indicators rose 0.1 percent after no change in the prior month. The index measures business lending, length of unemployment, service prices and ratios of labor costs, inventories and consumer credit.

The end of the recession won’t be signaled until the leading index and the ratio of coincident-to-lagging indicators turns positive for at least three months in a row, said Conference Board economist Ken Goldstein in an interview yesterday.

Still, “that would only mean the recession was losing steam, not that we were off and running,” Goldstein said, adding the data is unlikely to turn positive any “earlier” than the third quarter of next year.

To contact the reporter on this story: Shobhana Chandra in Washington schandra1@bloomberg.net

Last Updated: December 18, 2008 16:24 EST