Video: Economic outlook

updated 3/20/2008 2:33:49 PM ET 2008-03-20T18:33:49

A rise in jobless claims and a drop in a key forecasting gauge provided the latest evidence that the U.S. economy is faltering and may be slipping into recession.

The Conference Board, a business-backed research group, said Thursday that its index of leading economic indicators fell in February for the fifth consecutive month. The index, which is designed to forecast where the nation’s economy is headed in the next three to six months, dipped 0.3 percent to 135.0 in February after slumping 0.4 percent the month before.

In Washington, meanwhile, the Labor Department said that applications for unemployment benefits totaled 378,000 last week. That was an increase of 22,000 from the previous week and the highest level in nearly two months.

The four-week average for new claims rose to 365,250, which was the highest level since a flood of claims caused by the 2005 Gulf Coast hurricanes.

Ken Goldstein, labor economist at the Conference Board, said in a statement accompanying the leading indicators report that economic signals “are flashing yellow.”

He said the numbers indicate “the economy may be grinding to a halt” and that “a small contraction in economic activity cannot be ruled out.”

A Federal Reserve reading of business activity in the Philadelphia area showed contraction — but not as much as analysts expected. The news helped the stock market on Thursday recover from a drop the day before.

In afternoon trading, the Dow Jones industrial average climbed 158.02, or 1.3 percent, to 12,257.68. Other indexes also were up.

The economy has been hard hit by rising gas prices, falling home prices and tightening credit markets, which have forced consumers and businesses to cut spending. As a result, the U.S. economy may have stopped growing in the current quarter and could continue faltering in the second quarter. That would meet a technical definition of a recession — two consecutive quarters of economic contraction.

Pessimism about short-term U.S. economic prospects was voiced by the Organization for Economic Cooperation and Development, which on Thursday downgraded its growth forecasts for the United States, the euro zone and Japan

The OECD, a Paris-based institution that supports global development, cut its forecast for first-quarter gross domestic product in the United States to 0.1 percent and predicted that GDP would be flat in the second quarter.

Major Market Indices

Like the OECD, most experts expect any downturn to be relatively mild and probably short-lived. That’s because the Federal Reserve in recent months has aggressively lowered interest rates and made more funds available to banks and brokerages. And the Bush administration has been moving on several fronts to boost the economy, including the promise of tax rebates starting in the summer.

Scott Brown, chief economist with Raymond James & Associates in St. Petersburg, Fla., predicts that U.S. economic growth could be “close to zero, maybe negative” in the first half of the year but likely improve in the second half.

“It will take some time before the Fed rate cuts since January have an effect on the economy,” Brown said. And the rebates and other fiscal stimulus are likely to kick in to boost spending this summer, he added.

The economic weakness already is showing up in higher layoffs and weaker hiring numbers.

The Labor Department’s report said the total number of payroll jobs fell by 63,000 in February, an even bigger decline that the drop of 22,000 jobs in January, which had been the first monthly decline since mid-2003.

“We have no doubt that the trend in claims is upwards and is approaching the levels seen in the earlier stage of the recession in 2001,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

The reading for the Conference Board’s index of leading indicators was in line with the 0.3 percent decline expected by analysts surveyed by Thomson Financial/IFR.

The Conference Board said the leading index has declined 1.5 percent since August, with eight of its 10 components showing declines.

In the latest month, the biggest negative influences were unemployment insurance claims, building permits, vendor performance and consumer expectations.

The coincident index, which measures current activity, was unchanged for a third consecutive month at 124.9. The lagging index was up 0.2 percent in February after rising 0.1 percent in January.

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