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Spokane, Washington  Est. May 19, 1883

Signs Point To Strong Growth

Vincent Del Giudice And Marthe Fourcade Bloomberg News

The index of leading U.S. economic indicators rose at the fastest rate in five months in July and construction spending advanced - evidence that growth may accelerate in the last half of the year.

Investors, who had already seen evidence of July’s strength, weren’t troubled by the reports, pushing stocks higher and short-term interest rates lower. Still, some analysts said the news keeps alive the possibility Federal Reserve policy-makers could raise the overnight bank lending rate later this year to prevent the growing economy from sparking an acceleration in inflation.

“The economy is robust; leading indicators tell us it will continue on that path,” said Patrick Retzer, who helps manage $300 million in bonds at Heartland Advisors in Milwaukee. “If the strong data continues, I think they’ll have to raise rates later this year.”

The Conference Board’s index, intended to predict growth over the next half year, rose 0.3 percent in July - the best showing since February - after rising a revised 0.1 percent in June and 0.2 percent in May.

Meanwhile, spending on new U.S. construction rose in July for the second month in a row, Commerce Department figures showed. Spending increased 0.5 percent in July to a $598.7 billion annual rate, also the largest monthly gain since February when the economy was running at full throttle. That follows a revised 0.1 percent gain for June construction, which the government had previously estimated as a 1.1 percent drop.

If the economy’s strength persists, Fed policy-makers could spring into action, analysts said - if not at their next meeting Sept. 30, perhaps on Nov. 12 or Dec. 16.

“Whenever (Fed Chairman Alan) Greenspan gives his word they will move,” said Robert Dederick, an economic consultant at the Northern Trust Co. in Chicago. If nothing else, the Fed may raise rates to protect its credibility in its mission of guarding against accelerating inflation, Dederick said. “They may send the message: ‘We’re on the job - don’t worry,”’ he said.

The Conference Board’s index of leading indicators has risen in eight of the past nine months; not since April-May 1995 have there been two straight months without an increase in the LEI. A month ago, the New York-based business research group estimated the index held steady in June from May. And before Wednesday’s report, analysts expected an increase of 0.2 percent in the July index.

The leading index monitors a variety of previously released economic gauges, including the recently added spread between the yield on the 10-year Treasury note and the federal funds rate.

A widening spread between long-and short-term interest rates is seen as an indicator that Fed policymakers may push borrowing costs higher. The report no longer tracks changes in sensitive materials prices and unfilled factory orders.

Of the 10 indicators in the index, six made a positive contribution. They were led by a decline in jobless claims to a monthly average of 304,900, from June’s average of 338,900, and by an increase in stock prices. Other positive contributors were increased consumer confidence; a larger money supply; slower deliveries, a sign of pent-up demand; and an increase in building permits to 1.414 million at an annual rate in July from 1.402 million in June.

Three made a negative contribution, led by a narrower interest rate spread between 10-year Treasury notes and the overnight bank lending rate, a sign investors saw slower growth; a drop in the manufacturing work week to 41.7 hours in July from 41.8 hours in June; and weaker factory orders for consumer goods. One item, factory orders for non-defense capital goods, was unchanged.