Leading Indicators, New-Home Sales Advance Strongly

In a double dose of good news for the U.S. economy, the government’s index of leading economic indicators surged 1.1% in February, and sales of new homes jumped 16.2% for the same month, it was reported Friday.

“Both reports are fairly positive and indeed suggest the economy may be nearing a turning point,” said Cynthia Latta, an economist with DRI-McGraw Hill in Lexington, Mass.

The Commerce Department’s index of 11 separate economic gauges has not risen since last June. The 1.1% February jump in the index was the largest in almost three years.

While many analysts took heart in the index’s rise, some warned that it was premature to declare the recession over. An uptick in the index has signaled a return to overall economic growth in each of the past four recessions, but the time lag has been from one to six months, Latta said.

Many economists expect the current slump to fade away by September; a smaller group has said the economy could start to bounce back in the spring, boosted by an end to worries about the Persian Gulf War.

Those who argue that the slump grinds on point to various fundamental measures of the U.S. economy--including employment, industrial production, auto sales and income growth--that have continued to reflect weakness. The government index in February was buoyed by gains in other areas.

“Although some parts of the economy, such as housing, are bouncing back, the overall economy continues to decline,” said Richard Rahn, chief economist of the U.S. Chamber of Commerce.

Seven of 11 leading indicators rose last month, including stock prices, consumer confidence--both considered highly changeable--building permits, the money supply and manufacturers’ orders for consumer goods, the Commerce Department reported.

At the same time, three signs of the economy pointed downward. Benefit claims for unemployment continued to rise--suggesting continued weakness in the labor market--the workweek declined and there were fewer contracts for plants and equipment. One indicator, the speed of vendor deliveries, was unchanged.

Economic optimists were given added ammunition Friday by a separate Commerce Department report that sales of new homes jumped 16.2% in February, the biggest advance in nearly five years. The increase, the first since last November, followed a 12.6% drop in January.

Like the government index, an upturn in housing is also believed to signal that the broader economy will register gains. Similarly, there may be a time lag of months before the housing gains are reflected in an overall advance of the economy.

The rise in home sales was experienced throughout the nation, although the West gained just slightly with a 1.8% increase for a 113,000 annual rate. In the South, new-home sales rose 9.1%, and in the Northeast they were up 5.9%. The Midwest experienced an extraordinary 70.3% rise, which analysts explained in part due to good weather.

“All of our measurements of buyer traffic, current sales activity and builder sentiment have brightened substantially in the past two months,” said David Seiders, chief economist of the National Assn. of Home Builders.

“It is pretty clear that the housing market has started to move upward and that should give us an end to the recession by midyear,” he said.

Despite the big February jump, the annual sales rate in February remained 23% lower than the 606,000-unit level recorded a year earlier.

Housing sales peaked in 1986 at 750,000 and sank to the lowest level in 1990 since the last recession, when they fell to 412,000.

Index of Leading Indicators

Seasonally adjusted Index, 1982 = 100

Feb. ‘90: 144.1

Jan. ‘91: 139.0

Feb. ‘91: 140.5

Source: Commerce Department

THE ECONOMY The index of leading indicators rose last month for the first time since June and sales of new homes recorded the biggest gain in about five years.

THE CHANGES

Leading indicators: Up

New home sales: Up

WHAT DOES IT MEAN?

The gain in the leading indicators index raised hopes that the recession would soon end, buttressed by the strong home sales. But worry persists--there is still weakness in the labor market.

Source: U.S. Commerce Department

NEW HOME SALES

Seasonally adjusted annual rate, thousands of units

Feb. ‘90: 606

Jan. ‘91: 402

Feb. ‘91: 467

Source Commerce Department