Surprise increase in leading indicators

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NEW YORK (CNNMoney.com) -- A broad measure of the economy's health rose unexpectedly in September after declining for two consecutive months, the Conference Board announced Monday.

The New York-based business research group said its index of leading economic indicators rose 0.3% in September. Economists were expecting the index to have declined 0.1%, according to a survey conducted by Briefing.com.

In August, the index fell a revised 0.9% after a 0.7% decline in July.

Economic conditions started deteriorating this summer, and the recent volatility in the stock market and the credit crunch will "no doubt weaken the economy further," Ken Goldstein, a Conference Board economist, said in a statement.

"But latest data suggest that conditions in the non-financial economy are not falling apart," Goldstein said. "Data on hand reflect a contracting economy, but not one in free fall."

The "non-financial" economy consists of all businesses outside the financial services industry, including manufacturing and retail businesses, according to Frank Tortorici, a Conference Board spokesman.

The index registered growth in real money supply, consumer expectations, the interest rate spread and supplier deliveries. But its measures of building permits, stock prices and initial jobless claims remained weak last month.

"That was not the 'all clear' signal you heard," Tim Quinlan, economic analyst at Wachovia Economics Group wrote in a note to clients.

The surprise gain was boosted by "an outsized contribution from an increase in the money supply." And Quinlan says September's data does not change his forecast for slower economic growth in the months ahead.

Over the last year, the overall economy has continued to show signs of moderate growth. But the "wild gyrations on stock market" are beginning to take a toll on the "non-financial" or real economy, Quinlan said.

"People are reading headlines about financial Armageddon and they're putting their personal budgets on lock down," he said.

With consumer spending making up two-thirds of the nation's gross domestic product, the outlook for overall economic growth is bleak as nervous consumers cut back.

"It becomes a self fulfilling prophecy," Quinlan said.

The index is designed to predict economic activity six to nine months into the future. It incorporates a variety of economic data including jobless claims, manufacturers' new orders and personal income.