Economic volatility mirrored in index

The index of leading economic indicators has been fluctuating for months.

NEW YORK (AP) — A closely watched gauge of future economic activity edged up in July, reversing the previous month’s decline. The recent erratic pattern reflects uncertainty in a U.S. economy roiled by a credit crunch.

The Conference Board said Monday its index of leading economic indicators rose 0.4 percent in July, as analysts were expecting. The index fell 0.3 percent in June, after rising 0.2 percent in May.

The report is designed to forecast economic activity over the next three to six months.

The index has bounced up and down over the past few months, suggesting that economic growth is likely to continue but at a slower pace. With the latest report, the cumulative change in the index over the past six months has increased 0.1 percent.

The movement of the index over the past few months mirrors the volatility of the financial markets, said Aaron Smith, senior economist with Moody’s Economy.com.

While July’s pickup is in line with the 3.4 percent growth of U.S. economic output in the spring, the main drivers for the latest index — consumer confidence and jobless claims — may be temporary and dip in August, Smith said.

The recent crisis in the financial markets “has yet to manifest itself in the data,” Smith said.

Cut in Fed discount rate

Monday’s upbeat report follows the Federal Reserve’s decision Friday to cut its key discount rate by a half-percentage point, a dramatic move meant to stabilize financial markets pummeled by a rapidly spreading credit crisis.

In a statement explaining the action, the central bank said that while incoming data suggest the economy is continuing to expand at a moderate pace, “the downside risks to growth have increased appreciably.”

The Fed said it was “monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.”

The credit crunch started with rising defaults in subprime mortgages — home loans made to people with weak credit histories. Analysts believe these problems, along with declining consumer confidence, could lead to a recession.

Overall U.S. economic output, as measured by the gross domestic product, jumped in the spring to an annual rate of 3.4 percent, the fastest pace in more than a year and up sharply from 0.6 percent growth in the first three months of the year.

The market initially fell Monday after release of the July leading indicator report, but then rebounded later in the day.

The Dow Jones industrials rose 42.47, or 0.32 percent, to 13,121.35. Broader indexes were mixed. The Standard & Poor’s 500 index dipped 0.39, or 0.03 percent, to 1,445.55, while the Nasdaq composite index rose 3.56, or 0.14 percent, to 2,508.59.

The Conference Board report tracks 10 economic indicators. The advancing components in July were consumer expectations, vendor performance, unemployment claims, real money supply, stock prices and manufacturers’ orders for consumer goods and materials.