updated 8/21/2008 10:14:14 AM ET 2008-08-21T14:14:14

A private sector measure of the U.S. economy's health showed the largest drop in a year, and while new jobless claims fell for the second straight week, they remain near the highest levels since 2002. The reports are the latest evidence the languishing economy remains stuck in low gear.

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The New York-based Conference Board said Thursday its monthly forecast of future economic activity fell 0.7 percent in July, far more than the consensus estimate of a 0.2 percent decline by Wall Street economists surveyed by Thomson/IFR.

The last time the index showed a drop this great was last August, when it fell by 1 percent.

The largest drag on the index was the decline in building permits, followed by dropping stock prices, rising unemployment claims, a tightened money supply and falling manufacturers' orders for consumer goods. The index has slipped 0.9 percent for the six months ending in July.

"The economy is stuck somewhere between sluggish growth and recession," said Mark Vitner, senior economist at Wachovia Corp. "We're in economic purgatory."

Lehman Brothers economist Zach Pandl blamed the drop on technical factors, saying a change in New York City's building code, effective July 1, led to a June spike in new permits followed by last month's steep decline. He also attributed part of high jobless claims data to the 13-week extension of unemployment benefits approved by Congress in June.

"The decline in the leading index should therefore not be interpreted as a sign the outlook is quickly deteriorating," Pandl wrote in a research note.

Meanwhile, the Labor Department's jobless claims data showed new filings dropped to 432,000, down by 13,000 from the previous week, a greater improvement than analysts expected. However, the four-week average climbed to 445,750, the highest level since November 2003.

"The labor market is soft, but not collapsing," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. "That's critical. While consumers may be cautious and conservative in their spending, as long as the rate does not spike ... there should be enough income growth to keep the economy muddling along."

Unemployment claims have increased in the past several weeks, partly reflecting an outreach effort by the Labor Department to notify people of the benefit extension. The action has turned up some people eligible to file new claims.

That effort — coupled with businesses cutting jobs due to higher energy costs, tighter credit markets and a slowing economy — caused claims to spike to a six-year high of 457,000 for the week of Aug. 2.

The number of people continuing to receive benefits last week also dropped slightly to 3.36 million, but the four-week average rose to 3.33 million, its highest level in almost five years.

That number doesn't include the government's extended benefits program. The Labor Department estimated an additional 1.29 million unemployed workers are getting benefits under that program.

Companies likely will increase layoffs in the next several months, Vitner said, as profits continue to suffer from higher food and energy prices. The unemployment rate could reach 6.5 percent by mid-2009, from 5.7 percent in July, he said.

Several companies have announced job cuts recently. Newspaper publisher Gannett Co. Inc. said it would lay off 600 workers, Ford Motor Co. said it would cut 300 workers at an engine plant, and chip designer Rambus Inc. is trimming 90 jobs.

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