By Siobhan Hughes and Alex Tanzi
Washington, (Bloomberg) -- The U.S. economy is showing signs of stalling as manufacturing declines and unemployment lines lengthen, reports this week are likely to show.
Factory activity this month probably declined in New York State and the Philadelphia region. New claims for state unemployment benefits exceeded 400,000 for a fifth straight week, suggesting that the unemployment rate will creep higher, economists say the Labor Department will report Thursday.
A volley of reports that show an economy weakening makes it likely Federal Reserve policy makers will probably signal on Tuesday that a reduction in interest rates may be necessary in coming months, economists said.
``It's clear that momentum has changed,'' said Robert Gay, an economist at Commerzbank Securities Inc. in New York. Manufacturing and retail sales are ``fizzling, and that puts us in a very precarious position.''
Central bankers are expected to keep their benchmark interest rate at 1.25 percent after their Tuesday meeting. Economists surveyed by Bloomberg News expect them to take a step toward lowering the overnight rate by saying that the risks of a slowdown outweigh the threat of inflation.
Lehman Brothers Holdings Inc. said signs of a struggling economy will prompt the Fed to lower the overnight rate to 0.5 percent by May. Lehman joined J.P. Morgan Chase & Co., Merrill Lynch & Co. and HSBC Securities last week in forecasting rate reductions.
Manufacturing
Of the four, only Lehman expects the Fed to leave rates unchanged next week. In a Bloomberg News survey of 56 economists, 10 are forecasting a reduction to 1 percent Tuesday with the others expecting no change.
The Federal Reserve Bank of New York's Empire State manufacturing index probably fell to minus 2 in March, the worst in five months, from 1.1 in February, according to the median of 19 projections. The Fed's branch in Buffalo releases the report tomorrow. Readings below zero signal contraction.
The Federal Reserve Bank of Philadelphia's factory index probably fell to zero in March, also the worst since October, from 2.3 in February, a Bloomberg survey of economists found. The report is set for release on Thursday.
The job market is weakening anew. The Labor Department is expected to report on Thursday that the number of U.S. workers filing new claims for state unemployment benefits totaled 415,000, based on the median of 26 forecasts. That would compare with 420,000 the prior week and mark the longest series of readings above 400,000 since March-May of last year.
Leading Indicators
Declining production and rising jobless claims may be setting the stage for a slowdown in economic growth. The Conference Board's leading economic indicators index, a gauge of the direction of the economy over the next three to six months, probably fell 0.4 percent in February after dropping 0.1 percent in January, a Bloomberg survey found. The report is due for release on Friday.
Economists have already been scaling back forecasts for economic growth. The economy will probably expand 2.6 percent this year, based on the consensus of 54 economists in the March 10 Blue Chip Economics Indicators survey. That's down from the 2.7 percent growth they forecast a month ago.
A recent surge in energy costs is one threat. The consumer price index, the most widely followed gauge of inflation, probably rose 0.5 percent in February as gasoline and natural gas prices surged, economists said.
The Labor Department releases the report on Friday. Excluding food and energy, the index probably rose 0.2 percent, suggesting prices for most other goods and services are tame.
Housing Construction
Colder-than-usual weather in February probably put a dent in home construction. Builders probably broke ground on new homes at a 1.73 million-unit annual pace last month, the slowest since October, based on the median of 44 forecasts in a Bloomberg News survey. Building permits probably slipped to 1.745 million from 1.779 million, the Tuesday report is projected to show.
The U.S. government's finances are deteriorating as a result of the weak economy. The monthly budget deficit for February probably widened to $97.7 billion from $76.1 billion in the same month last year as rising unemployment held down income tax receipts and spending rose.