Leading Index Signals U.S. Growth to Pick Up Into 2014

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Photographer: George Frey/Bloomberg

A sign that reads "new home for sale" sits outside of a Garbett Homes net zero energy house, which produces as much energy as it consumes, under construction in Daybreak, Utah.

The index of U.S. leading indicators climbed in July by the most in three months, signaling improvements in housing and labor markets will help foster faster economic growth through year-end.

The Conference Board’s gauge of the outlook for the next three to six months increased 0.6 percent after no change in June, the New York-based group said today. Another report showed the fewest Americans since November 2007 filed applications for unemployment benefits in the past month.

The increase in the leading index was propelled by the drop in firings, rising stock prices and a thawing in lending that all point to a pickup in consumer spending. More sales of appliances and home-improvement merchandise at retailers such as Home Depot Inc. and Lowe’s Cos. show the recovery in housing is filtering through to other parts of the economy.

“One of the big underpinnings is obviously the housing market,” said Tim Quinlan, an economist at Wells Fargo Securities LLC in Charlotte, North Carolina. Economists at Wells Fargo are the best forecasters of the LEI in the last two years, according to data compiled by Bloomberg. The leading indicators are “consistent with the outlook for gradual improvement in the U.S. economy.”

Stocks rose, sending the Standard & Poor’s 500 Index rebounding from a six-week low, on better-than-estimated global manufacturing data. The S&P 500 advanced 0.9 percent to 1,656.95 at the close in New York.

Global Manufacturing

Chinese manufacturing resumed expansion this month after shrinking in July by the most in almost a year and output at European factories and services companies improved, other reports today showed.

Signs that global demand is stabilizing and an improving outlook in the U.S. are encouraging American employers to maintain headcount. Labor Department figures today showed the number of claims for jobless benefits in the month ended Aug. 17 declined by 2,300 to 330,500 a week on average, the least in more than five years.

The four-week moving average is a less volatile measure than the weekly figures, and is considered a better gauge of the trend in applications. Compared with a week earlier, applications rose by 13,000 to 336,000.

There is “legitimate improvement in the labor market,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “It’s more important to put the emphasis on the trend in claims, which remains favorable.”

August Employment

Last week included the 12th of the month, which coincides with the period the Labor Department surveys employers to calculate monthly payroll data. The four-week average was down from the 346,500 average during the comparable period in July. The employment report for August will be released on Sept. 6.

The median forecast in a Bloomberg survey of 42 economists for the leading economic indicators index called for a 0.5 percent advance. Estimates ranged from increases of 0.2 percent to 0.7 percent.

Eight of the 10 indicators in the leading index strengthened in July, led by a widening gap between long- and short-term interest rates, higher stocks and more building permits. Fewer jobless claims and gains in factory orders also propelled the leading index last month.

The report also showed that loans are becoming easier to get. The increase in the Conference Board’s proprietary credit index, which takes into account reports such as the Federal Reserve’s loan officer survey and investor sentiment, matched the gain in February 2011 as the biggest since January 2004.

Second Half

The improvement indicates “better economic and job growth in the second half of 2013,” Ken Goldstein, an economist at the Conference Board, said in a statement. “However, the biggest uncertainties remain the pace of business spending and the impact of slower global growth on U.S. exports.”

Strength in the housing market is contributing to economic growth and bolstering sales at home-improvement retailers such as Lowe’s and Home Depot. Both companies reported earnings this week that beat analysts’ estimates and raised their profit forecasts for 2013.

Higher home prices, which have boosted household net worth, are propelling demand for appliances and other big-ticket items that Americans were reluctant to buy in the housing downturn, Lowe’s Chief Executive Officer Robert Niblock said yesterday.

“Our second quarter sales performance exceeded our expectations, due in part to strong demand for appliances and recovery in our garden department,” Carol B. Tome, chief financial officer at Atlanta-based Home Depot, said on an Aug. 20 earnings call.

Federal Reserve

Fed policy makers are gauging the strength of the economy as they debate dialing back record monetary stimulus. Minutes from the Fed’s July 30-31 meeting showed officials “continued to anticipate that the growth of real GDP would pick up somewhat in the second half of 2013 and strengthen further thereafter.”

Policy makers considering reducing $85 billion in monthly asset purchases were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to taper this year if the expansion strengthens, with a few saying a reduction may be needed soon, the minutes showed yesterday.

To contact the reporter on this story: Jeanna Smialek in Washington at Jsmialek1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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