Key Economic Indicators Drop : Conflict With Other Data Signaling Growth

The government’s index of leading indicators, the chief barometer of the U.S. economy’s future direction, fell 0.2% in December and posted a less healthy gain in November than originally estimated, the Commerce Department reported Thursday.

Coming at a time when other indicators are signaling renewed vigor in the nation’s economy, this latest report raises questions about the true course of the economy. But most private economists said that December’s dip in the index does not change the outlook for healthy growth this year.

“I’m going to write off the December indicators,” said Jerry J. Jasinowski, chief economist of the National Assn. of Manufacturers. “The decline in the index is very hard to reconcile with the other evidence that growth is picking up in the early part of 1985.”

At the White House, spokesman Larry Speakes said that the 0.2% drop in the index “is not a matter of concern to us. Virtually all economic factors are reflecting exceptionally strong growth . . . growth that surprises even the economists themselves.”

In its report on the index, which comprises a dozen statistical measures that tend to rise or fall in advance of the overall direction of the economy, the Commerce Department said that the biggest contributors to the December decline were a drop in new contracts and orders for plants and equipment and a falloff in the formation of new businesses.

In addition, the report cut November’s 1.3% gain by slightly more than half to a 0.6% advance and revised August’s 0.1% increase to a 0.1% decline.

Index Called Useless

John M. Albertine, president of the American Business Conference, a coalition of mid-size, high-growth companies, said that the month-to-month revisions in the index “make it virtually useless as a forecasting tool. You can get sounder economic forecasts from a palm reader than this index.”

The change for August means that the index fell for three straight months last year, from June through August. In the past, three straight months of decline have sometimes heralded the start of a new recession within nine months.

But Jeffrey Shapiro, an economist with the private forecasting firm of Wharton Econometrics in Philadelphia, said: “This three-month rule of thumb that is often used isn’t really a good indicator. You need more months of consistent declines before you can raise a warning flag, and at this point there’s no real reason to be concerned.”

According to Wharton’s forecast, the economy will grow at a robust annual rate of 4.6% in the first quarter of this year and 4.5% in the second, with some slackening in the second half of the year but not a sharp reversal.

Factory Orders Down

In two other economic reports Thursday, the government announced that factory orders for manufactured goods also tumbled in December but that the sales of new homes rose, boosting the level of housing sales to its highest point in five years.

Factory orders fell 0.7% in December, but many analysts said that the drop was insignificant because it chiefly reflected a slump in defense orders after an unusually large jump the month before. Overall last year, orders for manufactured goods rose 10.5% to a record $2.3 trillion, the strongest annual gain since a 12.1% advance in 1979.

New home sales climbed 3.1% in December, bringing sales for the entire year to a total of 639,000 units, the best year for housing sales since 1979. Michael Sumichrast, chief economist of the National Assn. of Home Builders, said that declining mortgage interest rates should spur further growth in housing sales in the months ahead.

“We’ve seen a decline in interest rates of 2.5 percentage points,” Sumichrast said. “So we believe that, in the first part of 1985, we will see strong sales. The entire year of 1985 will be somewhat weaker than 1984, but it will still be a pretty respectable year.”

Declines Offset Gains

The Commerce Department’s report on December’s leading indicators said that declines in five of the 11 indicators available for the month offset gains in the other six. Besides the slumps in orders for factory equipment and in creation of new businesses, the three other components on the negative side were the vendor performance in making deliveries, stock market prices and building permits.

“There are some suspicious questions about vendor performance, building permits and stock market data in the December report,” Jasinowski said. “Vendor performance looks like it was affected by the weather, building permits grew very rapidly in the previous month, making further gains unlikely at the present time, and, while the stock market went down in December, it went up in January.”

The six indicators that improved in December were growth of the nation’s money supply, the average number of new unemployment claims, new orders for consumer goods, outstanding credit, growth in the average workweek and prices of sensitive raw materials.