U.S. Economy: Factory Index Falls, Leading Gauge Up (Update1)

June 19 (Bloomberg) -- A Philadelphia-area report showed manufacturers are suffering from slower consumer spending and an index that points to the direction of the economy in the next six months indicated it will struggle to grow this year.

The Conference Board's leading-indicator measure rose 0.1 percent in May, the New York-based research group said today. The Philadelphia Federal Reserve's general economic index dropped to minus 17.1, lower than forecast, from minus 15.6 in May. Its prices-paid gauge soared to the highest level since 1980.

Today's figures reinforce economists' forecasts for U.S. growth to remain below 2 percent until the middle of 2009. The stagnation will be coupled with a pickup in inflation, underscoring the risk that the Fed will be forced to raise interest rates by year-end.

``The economy is extremely weak and the bottom line is we're still not out of the recession woods,'' said Michael Gregory, a senior economist at BMO Capital Markets in Toronto, who correctly forecast the increase in the leading index. ``It's a difficult time to be the Fed. The minimum they do now is talk very, very tough on inflation going forward.''

Treasuries dropped with benchmark 10-year yields at 4.21 percent at 4:14 p.m. in New York, from 4.14 percent late yesterday. The Standard & Poor's 500 stock index rose 0.4 percent to close at 1,342.83.

Fewer Claims

A government report today showed the number of Americans filing first-time claims for unemployment benefits fell last week to 381,000, from 386,000 the prior week. Total benefits rolls slipped to 3.06 million for the week ended June 7.

The Philadelphia Fed's measure of new orders decreased to minus 12.4 from minus 3.7 the prior month, and a measure of shipments dropped to minus 6.7 from 2.2. Its prices paid gauge jumped to 69.3 from 53.8, while prices received decreased to 29.7, from 31.6.

Philadelphia-based Rohm & Haas Co., the world's biggest producer of acrylic-paint ingredients, said yesterday it plans to cut about 925 jobs and reduce production capacity to improve profitability.

Surging oil prices have strained Rohm & Haas, Dow Chemical Co. and other producers of building materials and plastics. In a statement, Rohm & Haas said it is experiencing a ``rapid erosion'' of U.S. business conditions.

Fed Expectations

Investors were almost certain the Fed will raise its benchmark rate by at least a quarter point by September, according to futures trading. The odds of an increase rose to 98.8 percent at 4:23 p.m. in New York, up from 95.2 percent late yesterday.

The Conference Board's index was forecast to be unchanged, according to the median estimate of 59 economists in a Bloomberg News survey.

Four of the 10 indicators in today's report added to the index, led by increases in stock prices and Treasury yields.

``It's basically a flat picture,'' Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania, said in a Bloomberg Television interview. ``It looks like manufacturing is still weakening. The leading index was up largely because of stock prices.''

A 0.09 percentage-point lift came from the Standard & Poor's 500 index, which averaged 1,403 last month, up from 1,370 in April. A widening in the spread between 10-year Treasury yields and the federal funds rate contributed 0.19 percentage point.

Rise in Orders

New orders for consumer goods and bookings for capital equipment each added 0.01 percentage point to the index.

Money supply adjusted for inflation, which has the biggest weighting in the index, subtracted 0.14 percentage point.

Building permits, a sign of future construction, subtracted 0.04 percentage point. Permits fell 1.3 percent to a 969,000 annual rate in May, according to government figures. Housing starts plunged to the lowest level in 17 years.

Confidence also was a drag, taking away 0.06 point from the leading measure. The Reuters/University of Michigan index of consumer expectations for six months from now, which economists view as an indicator of future spending, fell to 49 in June, from 51.1 last month.

Slower supplier deliveries were also a negative influence on the leading index and the factory workweek had no effect.

May Claims

Jobless claims subtracted 0.01 percentage point from the leading index. Weekly initial claims have averaged 359,900 so far this year, compared with 321,000 in 2007, indicating the labor market will remain weak in coming months.

Fewer jobs are one reason consumer spending, the biggest part of the economy, may fail to get a sustained boost from the government's fiscal stimulus plan.

Best Buy Co., the largest U.S. electronics retailer, said a jump in first-quarter sales of flat-panel television sets was partly due to the rebate checks. The company kept annual profit estimates unchanged even after quarterly results beat analysts' forecasts.

``It is very early in what we still expect to be a volatile year for the consumer,'' Chief Financial Officer Jim Muehlbauer said on a conference call with analysts this week.

The Conference Board's index of coincident indicators, a gauge of current economic activity, rose 0.1 percent, after dropping 0.1 percent the prior month. The index tracks payrolls, incomes, sales and projections.

The gauge of lagging indicators rose 0.2 percent following 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.

To contact the reporter on this story: Shobhana Chandra in Washington schandra1@bloomberg.net, Courtney Dentch in New York at cdentch1@bloomberg.net

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net