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Leading Index in U.S. Unexpectedly Falls in Sign Economic Growth May Slow

The index of U.S. leading economic indicators unexpectedly declined in April, a sign the economic expansion may slow in the second half of the year.

The 0.1 percent decrease in the New York-based Conference Board’s measure of the outlook for three to six months followed a revised 1.3 percent gain in March. It was the first decline for the index in a year.

The initial factory-induced rebound from the worst recession since the 1930s, which is broadening to include advances in consumer spending and service industries, still faces hurdles. A slump in building permits, little letup in firings and retreating stock prices highlight risks to the strength of the recovery as concern over the European debt crisis mounts.

“It is unlikely that the U.S. economy can shrug off the troubling developments in the euro zone,” said John Herrmann, senior macro strategist at State Street Global Markets in Boston, who correctly forecast the drop. “The manufacturing rebound may be cooling a little bit from the torrid pace we’ve seen. There may also be disappointments on the retail side.”

The a report from the Federal Reserve Bank of Philadelphia showed factories in the region expanded this month at the fastest pace of the year. The bank’s general economic index climbed to 21.4 from 20.2 in April. Readings greater than zero signal growth.

New York Fed

The report ran counter to a similar measure from the Fed Bank of New York earlier this week that showed manufacturing in that region slowed in May.

More Americans unexpectedly filed applications for unemployment benefits last week, showing firings remain elevated even as employment climbs, figures from the Labor Department also showed today. Initial jobless claims rose by 25,000 to 471,000 in the week ended May 15, exceeding the median forecast of economists surveyed by Bloomberg News and the highest level in a month.

Stocks dropped on concern Europe’s debt crisis is getting worse. The Standard & Poor’s 500 Index fell 2.8 percent to 1,084.05 at 10:35 a.m. in New York. Treasury securities surged, sending the yield on the benchmark 10-year note down to 3.23 percent from 3.37 percent late yesterday.

Unexpected Drop

The drop in the leading index last month compared with a median estimate calling for a 0.2 percent increase, according to 59 economists surveyed by Bloomberg News. Projections ranged from a 0.4 percent decrease to a gain of 0.5 percent. March’s increase was the biggest since May 2009.

Six of the 10 components of the leading index subtracted from the measure, led by declining building permits, faster supplier deliveries, shrinking money supply and rising initial jobless claims. A positive interest-rate spread, gains in stock prices and longer factory workweeks limited the decline.

“These latest results suggest a recovery that will continue through the summer, although it could lose a little steam,” Ken Goldstein, a Conference Board economist, said in a statement.

The interest-rate spread and stocks may be less supportive this month. The gap between 10-year Treasury note yields and the overnight fed funds rate will probably narrow in May as the note’s yield drops on growing concern over European debt.

Stocks Retreat

The Standard & Poor’s 500 Index averaged 1,197.32 last month, up from 1,152.05 in March. The index was down more than 10 percent today from an April 23 high on concern measures aimed at avoiding a Greek default will choke economic growth. In a worst-case scenario, contagion could spark another credit crunch reminiscent of the September 2008 financial collapse, leading to a double-dip global recession, according to New York University professor Nouriel Roubini.

A Commerce Department report this week showed building permits fell 11.5 percent in April to the lowest level in six months. The drop signals residential construction will pause in coming months.

Manufacturing is one area showing few signs of letting up as companies rebuild stockpiles, exports grow and businesses invest in new equipment. The factory workweek climbed by 12 minutes to 41.2 hours in April, according to figures from the Labor Department.

Caterpillar Inc., the world’s largest construction- equipment maker, is among companies profiting from the rebound in exports and orders. The Peoria-Illinois-based company projects sales to increase in 2010 as demand from mining and energy markets pick up, Chief Executive Officer Jim Owens said May 5 in an interview in Washington.

“We’re seeing a very sharp recovery in 2010,” Owens said in the interview. “Exports by the end of the year will be close to record levels.”

Dollar’s Drop

Even here, the outlook may be turning a little murkier. The jump in the value of the dollar caused by mounting concern over European debt means American goods will become more expensive to buyers overseas.

Among retailer expecting slow growth, Kohl’s Corp., the fourth-largest U.S. department-store chain, last week forecast second-quarter profit that trailed analysts’ projections. While shoppers are spending more now, they’re also being careful about their purchases, said Kevin Mansell, chief executive officer at the Menomonee Falls, Wisconsin-based company.

The economy will expand 3 percent this year, according to the median forecast of economists surveyed from April 29 to May 10. That compares with a 2.4 percent contraction last year.

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

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