updated 6/17/2004 11:06:13 AM ET 2004-06-17T15:06:13

A closely watched gauge of future economic activity rose a stronger-than-expected 0.5 percent in May, suggesting that the U.S. economy will continue sturdy expansion through the summer.

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The Conference Board said Thursday its Composite Index of Leading Economic Indicators increased to 116.5 last month following rises of 0.1 percent in April and 0.8 percent in March.

Analysts had been expecting an increase of 0.4 percent in May.

Ken Goldstein, economist for the Conference Board, said the latest data "reflect a robust economic environment this spring and point to more of the same this summer."

But Goldstein also cautioned that inflationary factors appeared to be building, which could encourage the Federal Reserve to raise interest rates sooner or faster to hold down price increases and cool the economy. At the same time, he added, business investment, inventory building and export growth looked solid.

"This confluence of economic strengths is a recipe for continued job gains, and possibly a little more inflation," he said.

The index is closely watched because it is designed to predict the economy's path in the next three to six months.

Also Thursday, the Labor Department reported that new applications filed for unemployment insurance dropped by a seasonally adjusted 15,000 to 336,000 last week, the lowest level since May 8. The decline left claims at a level that was lower than the 342,000 that some economists were forecasting.

The department also said that the Producer Price Index, which measures prices of goods before they reach store shelves, rose by 0.8 percent in May following a 0.7 percent rise in April. Higher prices for energy and food were the culprits behind the rise in wholesale prices for both months.

Excluding energy and food prices, "core" wholesale prices rose by a more modest 0.3 percent in May, after a 0.2 percent rise the month before.

The Conference Board, which is based in New York, said that eight of 10 indicators that make of the leading index increased in May. They were average weekly manufacturing hours, the money supply, interest rate spread, vendor performance, building permits, manufacturers' new orders for consumer goods and materials, a drop in initial claims for unemployment and manufacturers' new orders for nondefense capital goods.

The negative contributors were consumer expectations and stock prices.

The index of coincident indicators, which tracks current economic performance, rose 0.3 percent to 117.6 in May after advancing 0.3 percent in April to 117.2.

The index of lagging indicators was up 0.1 percent in May to 97.9 after rising the same amounting in April to 97.8.

Copyright 2004 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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