Industry research group The Conference Board said Thursday that its composite index of leading indicators, which is meant to project changes in the economy six to nine months in advance, slipped 0.5 percent to 137.3 in February after a revised 0.3 percent decline to 138 in January.
The drop in February, while expected, was the steepest since February 2006.
Meanwhile, the Labor Department said on Thursday that jobless claims dropped last week for the third consecutive time, signaling that the labor market is not seriously weakening although the overall economy is slowing.
The Labor Department reported Thursday that the number of applications for jobless benefits totaled 316,000 last week, a decline of 4,000 from the previous week.
Conference Board labor economist Ken Goldstein said in a statement that the drop in leading indicators suggests "moderate but choppy" economic growth. But the economy's saving grace is the consumer, who has been resilient despite swings in gas prices and cooling home values, he added.
Michael Gregory, senior economist at BMO Nesbitt Burns, said that job growth in sectors like health care, education and leisure has spurred consumer spending and confidence.
"Jobs and wages have been the elixir for the U.S. economy," Gregory said.
In February, more people filed for unemployment insurance, fewer homebuilders obtained permission to build houses and consumers adopted a more tempered outlook on the economy's future, the Conference Board said.
"This is consistent with the outlook that the economy will probably grow at a moderate pace over the next six to nine months," said Gary R. Thayer, chief economist at AG Edwards & Sons Inc.
On Wednesday, the Federal Reserve kept interest rates unchanged, but hinted that an interest rate cut may be needed to help boost a weak economy.
The question for the economy now, Gregory said, is how far the ripples from the housing market will spread. Housing is a crucial sector because it creates construction jobs, gives consumers equity in their homes, and supports a number of other industries like real estate brokerage, home-improvement retailing and mortgage finance.
The housing boom ended about a year ago. Home prices are stagnant and in some markets they are falling.
For example, KB Home, a homebuilder based in Los Angeles, on Thursday pointed to a "persistent imbalance in housing supply and demand," prompting builders to charge lower prices. KB Home's chief executive, Jeffrey Mezger, said he expects this condition to continue at least for the rest of the year.
Earlier this month, Donald Tomnitz, CEO of Forth Worth, Texas-based homebuilder D.R. Horton Inc., said the housing market slump will last all of 2007.
Gregory predicts the sluggish housing market coupled with the ailing auto industry will curb job growth and restrain the broader economy this year. The Conference Board's coincident index increased 0.3 percent in February after a 0.1 percent decline in January and the lagging index increased 0.2 percent in February after increasing 0.7 percent in December. The Conference Board reports "adds to the body of evidence that the U.S. economy is shifting to a slower gear," Gregory said. Stocks were mixed Thursday. The Dow Jones industrial finished the day at 12,461.78, up 14.26. The Standard & Poor's 500 Index fell 0.44 to 1,434.59.