Leading index forecasts more economic malaise

The index of leading indicators, a key gauge of the future state of the economy, fell below the boom-or-bust threshold of 50 percent in August, the first time since the beginning of the year, the Cabinet Office said Monday in a preliminary report.

The index, which gauges economic moves about six to nine months down the road, came to 44.4 percent, indicating rising uncertainty over prospects for recovery.

The index of coincident economic indicators, meanwhile, came to a preliminary 77.8 percent, its seventh consecutive month above the 50 percent line. The index is a gauge of the current state of the economy.

“The coincident index is improving,” according to Yoshihiko Senoo, director at the Cabinet Office’s Economic and Social Research Institute, repeating the same view the government has held since May.

An index reading above 50 percent is considered a sign of economic expansion, while a figure below that mark is considered a sign of contraction.

Examining the leading indicators, it is too early to predict whether the index will continue to decline, Senoo said.

“The number of those with a clear deteriorating trend is increasing,” he said. “We will have to watch the future quite severely.”

The ratio of industrial inventories to shipments turned negative for the first time in eight months after companies concluded inventory adjustments, and the indicator for shipments of durable consumer goods fell for the first time in seven months.

With the indicators for housing starts and interest rates remaining negative, the positive reading on consumer behavior may also drop, given the slumping stock market, Senoo said.

Regarding the coincident indicators, those for wholesalers’ sales turned negative, while the margin of gains in production-related indicators showed substantial shrinkage, Senoo said.

The government also repeated its warning that the movements of the external economies and domestic demand should be closely monitored, since production is being driven by exports.

“The coincident index is improving. However, it should be noted that the brisk production-related indicators are largely due to foreign demand, so moves of overseas economies and domestic demand will have to be closely monitored from now,” Senoo said.

Nevertheless, the coincident index may stay above 50 percent in September as well, he said.

Meanwhile, the lagging index, which measures performance in the recent past, scored 50 percent for the second month in a row after zig-zagging around the threshold since April.

The three diffusion indexes of the coincident, leading and lagging indicators compare current levels of various economic indicators with what they were three months earlier.