Index Suggests Stage Set for Business Turnabout

The slumping U.S. economy may be poised for a rebound, according to a key gauge of future economic activity.

The New York-based Conference Board said Wednesday its index of leading economic indicators rose 0.5% to 109.3 in May, moving higher for a second straight month and beating analysts’ expectations of a 0.3% increase.

Higher stock prices and lower interest rates drove the index upward last month, helping to set the stage for an improvement in the business climate, economists said.

“This is telling you things are dismal now, but they’re going to get better,” said Hugh Johnson, chief investment officer at First Albany Corp.

May’s reading marks the first time the index has risen for two consecutive months since late 1999. The barometer is designed to forecast the economy’s trend in the next three to six months.

Economists said the index reflected the positive effects of the Federal Reserve’s aggressive interest-rate-cutting campaign during the first half of the year.

“Financial conditions are improving and that’s often the beginning of the recovery process,” said David Orr, economist at First Union Corp. “It’s as if the economy has been slipping into quicksand and we’re up to our knees, and the financial indicators are going to pull us out.”

The Conference Board said six of the 10 components that make up the leading indicators index improved last month: interest rates, stock prices, consumer expectations, money supply, building permits and manufacturers’ new orders for non-defense capital goods.

The negative contributors to the index were vendor performance, average weekly manufacturing hours, and average weekly initial claims for unemployment insurance. Manufacturers’ new orders for consumer goods held steady.

The group’s index of coincident indicators, which measures current economic activity, held steady at 116.3.

“Although the economy remains soft, although the manufacturing sector is in a recession and although we’re experiencing a profits recession, these indicators say that it’s going to end,” Johnson said. “If you’re looking for evidence of a recovery . . . you are getting it now.”

The Conference Board is a nonprofit research and business group, with more than 2,700 corporate and other members around the world.