Continued weakness in home construction contributed significantly to December’s 0.2 percent decline in the U.S. leading index, a gauge of future economic activity, The Conference Board reported today.

A report Thursday from the U.S. Commerce Department found that housing starts last month fell to their weakest level since 1991 as builders try to sell off the massive amount of inventory of new homes on the market amid readjusting home loans and subsequent foreclosures, tightened credit standards and souring earnings reports that have wreaked havoc on home builders in 2007.

December’s drop in the leading index is the third straight monthly decline, and the index now stands at 136.5, the lowest since mid-2005.

Besides building permits, other components making a significant negative impact on the index last month were declines in manufacturing hours worked and orders for nondefense capital goods, and a rise in jobless claims, all of which outweighed gains in vendor performance, money supply and stock prices.

With December’s decline, the leading index is down 0.8 percent (a decline of 1.6 percent annual rate) from June to December, and it is 1.4 percent below its December 2006 level. While the strengths and weaknesses among its components were roughly balanced throughout most of 2007, weaknesses have become more widespread in the last two months.

However, despite the spreading weakness, the decline in the index over the last 12 months is still smaller than the 2.6 percent drop seen between its previous peak in January 2000 and March 2001.

In addition, real GDP, which measures the total value of goods and services produced by the United States in a given period, grew at an average annual rate of 3.1 percent through the third quarter of 2007 (including a 4.9 percent annual rate growth in the third quarter). Taken together, however, the recent behavior of the composite indexes highlights increasing risks for further economic weakness and suggest that economic activity is likely to be sluggish in the near term.

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