Growth forecast to slow in U.S.

A private-sector measure of the economy’s health showed the largest drop in a year, and although new jobless benefit claims fell for the second straight week, they remain near the highest levels since 2002. The reports are the latest evidence that the languishing U.S. economy remains stuck in low gear.

The New York-based Conference Board said Thursday that its monthly forecast of future economic activity fell 0.7% in July, far more than the consensus estimate of a 0.2% decline by Wall Street economists surveyed by Thomson Reuters.

The last time the index showed a drop this great was last August, when it fell 1%.

The largest drag on the index was the decline in building permits, followed by dropping stock prices, rising unemployment claims, a tightened money supply and falling factory orders for consumer goods. The index slipped 0.9% for the six months that ended in July.

“The economy is stuck somewhere between sluggish growth and recession,” said Mark Vitner, senior economist at Wachovia Corp. “We’re in economic purgatory.”

Lehman Bros. economist Zach Pandl blamed the drop on technical factors, saying a change in New York’s building code, effective July 1, led to a June surge in new permits followed by last month’s steep decline. He also attributed part of the high jobless claims data to the 13-week extension of unemployment benefits approved by Congress in June.

“The decline in the leading index should therefore not be interpreted as a sign the outlook is quickly deteriorating,” Pandl wrote in a research note.

Meanwhile, the Labor Department’s jobless claims data showed new filings dropped to 432,000, down 13,000 from the previous week, a greater improvement than analysts expected. However, the four-week average climbed to 445,750, the highest level since November 2003.

“The labor market is soft but not collapsing,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pa. “That’s critical. While consumers may be cautious and conservative in their spending, as long as the rate does not spike . . . there should be enough income growth to keep the economy muddling along.”

Unemployment claims have increased in the last several weeks, partly reflecting an outreach effort by the Labor Department to notify people of the benefit extension. The action has turned up some people eligible to file new claims.