Smaller job losses, rising stock prices and stabilization in homebuilding and manufacturing are evidence that the US government’s efforts to stem the financial crisis and lower borrowing costs may pay off

The index of US leading indicators rose in June for a third consecutive month, reinforcing signs the economy may be emerging from the worst recession in five decades.

Smaller job losses, rising stock prices and stabilization in homebuilding and manufacturing are evidence that government efforts to stem the financial crisis and lower borrowing costs may pay off. A jobless rate that is forecast to reach 10 percent and falling home values are a reminder that any expansion will be muted as consumers rein in spending and boost savings.

“The outlook over the next few quarters is improving,” Jeffrey Roach, chief economist at Horizon Investments in Charlotte, North Carolina, said before the report. “We see the recession likely ending by the end of year but that is not without some months of turbulence.”

Stocks, one component of the leading index, extended gains following the report. The Standard & Poor’s 500 Index rose 0.8 percent to 948.25 at 10:05 a.m. Monday in New York. The S&P 500 index average rose 2.6 percent in June and has soared about 40 percent since March 9 – when it reached its lowest level in more than 12 years. Last month’s gain contributed 0.1 percentage point to the leading index.

Seven of the 10 indicators in Monday’s report added to the index while three indicators subtracted from it. A growing divergence between long- and short-term interest rates, rising stock prices, a longer factory workweek, increases in building permits and falling jobless claims contributed to the gain. Falling money supply, orders for capital goods and consumer expectations pulled down the index.

The biggest boost was provided by a widening spread between the 10- year Treasury note, where yields rose based on mounting speculation of an economic recovery, and the overnight fed funds rate.

Bernanke testimony

Federal Reserve chairman Ben S. Bernanke is slated to deliver his semiannual economic report to Congress today. He’s expected to outline his strategy for exiting the biggest monetary expansion in history in order to contain inflation. Keeping a lid on prices would give the central bank leeway to maintain the overnight rate near zero for an extended period of time, economists said.

The housing slump, now in its fourth year, may also be stabilizing. Building permits, a sign of future construction, climbed 8.7 percent in June, the biggest gain in a year, the Commerce Department said last week.

Seven of the 10 indicators for the leading index are known ahead of time: stock prices, jobless claims, building permits, consumer expectations, the yield curve, factory hours and supplier delivery times.

The Conference Board estimates new orders for consumer goods, bookings for capital goods, and the money supply adjusted for inflation.

Coincident measures

The Conference Board’s index of coincident indicators, a gauge of current economic activity, dropped 0.2 percent after decreasing 0.3 percent the prior month. The National Bureau of Economic Research, the arbiter of when recessions begin and end, follows this index to help it time downturns. The index tracks payrolls, incomes, sales and production.

Improved bank earnings last quarter are among signs that credit has been at least partially restored after last year’s financial crisis.

Citigroup Inc., shored up with government bailout funds and the sale of a brokerage unit, posted a $4.28 billion profit in the second quarter, compared with a loss a year earlier.

Source: Bloomberg