Washington, March 20 (Bloomberg) -- The index of leading U.S. economic indicators in February fell the most in five months, showing the economy was weakening prior to the U.S attack on Iraq. The Conference Board's gauge of the performance of the economy over the next three to six months fell 0.4 percent in February after rising a revised 0.2 percent in January. The decline was the largest since a 0.5 percent decrease in September of last year. Falling stock prices, the weakest consumer confidence in a decade and rising jobless claims pushed down the index, as war worries dimmed the outlook for the economy. Economists say that the pace of growth in coming months may hinge on the outcome of military action. ``Nervousness over world events, more than any other single factors, holds the potential for extending the `soft spot' that the economy has been in since late last year,'' said Ken Goldstein, an economist at the New York group. ``There are also signs that consumer spending could be slowing.'' Consumer purchases are important because they account for more than two-thirds of the economy. Economists had projected a 0.4 percent decline in the index, based on the median of 55 forecasts in a Bloomberg News survey. Many economists have already scaled back forecasts for growth in the first half of this year. Projections for first- and second- quarter growth were each cut by 0.4 percentage points, to 2.2 percent and 2.8 percent, according to the latest monthly Blue Chip Economic Indicators survey.
Factory Orders
Six of the 10 indicators the New York group uses to calculate the index pushed down the index and three made positive contributions. The group bases its measurement on seven previously reported economic statistics and estimates for three others. Besides a drop in consumer expectations, falling stock prices and rising jobless claims, factory orders for consumer goods and business equipment also subtracted from growth. A narrower spread between the yield on the 10-year Treasury note and the percent overnight bank lending rate provided another drag. The index was helped by an increase in homebuilding permits and growth in the money supply. Slower vendor delivery times, which imply faster demand, also had a positive effect on the index. A gauge of factory hours was unchanged. The Conference Board's index of coincident indicators, a gauge of current economic activity, was unchanged in February after rising 0.2 percent in January. The index of lagging indicators fell 0.1. percent last month, compared with a 0.1 percent rise the prior month.
Methodology
The leading index is calculated by tallying the contribution of each of 10 components, and based on that methodology, the index would have shown a 0.28 percent decline. Goldstein, the Conference Board economist, said that the New York group rounds each of the components, and then adds up the contribution of those rounded numbers to derive the overall index. Goldstein said that's how the group came up with the reported 0.4 percent drop. ``That's the way we've been doing it all along,'' he said. ``This is just a fluke that the difference looks as big as it does this month.'' The economic weakness that appeared in February led many economists to lower growth forecasts for the 2003 first half. The Standard & Poor's 500 Index fell almost 2 percent last month. The University of Michigan's consumer sentiment index dropped to 82.4, the lowest since September 1993, and has since declined even more. Weekly jobless claims reached 435,000 at the end of February, the highest so far this year.
War
A decisive victory in Iraq within weeks by U.S. and allied forces may revive the stalled U.S. economic recovery, some economists said. The removal of Saddam Hussein may bolster consumer confidence, stimulate investment and further reduce oil prices. A war lasting three to six months could push crude prices higher, reduce consumer spending and slow the economy, based on computer studies. ``The economy is at a tipping point,'' said Lakshman Achuthan, an economist at the Economic Cycle Research Institute in New York. ``If things are resolved in short order, then a faltering recovery is going to strengthen.'' The Federal Reserve on Tuesday held interest rates at a 41- year low and refrained from characterizing the outlook for the economy, saying that the war with Iraq made it impossible to give estimates. ``The Fed's basically telling us that they don't have any idea what they're going to do,'' said Ethan Harris, chief economist at Lehman Brothers Inc. in New York, before the report. ``It doesn't really help you as a Fed forecaster. They're basically just throwing up their hands.'' //www.quote.bloomberg.com