Surge in Key Index Signals More Growth

The government’s gauge of future economic activity surged 1.7% in January, the Commerce Department reported Friday, offering some assurance that the economic recovery should continue this year.

The increase--the largest in 20 months--came on the heels of a moderate decline in December, which was revised from the previously announced 0.2% to 0.5%.

“Most people have now dropped the idea of a recession from their forecasts for 1985,” said Paul Manchester, an economist with Congress’ Joint Economic Committee. But few analysts said that they expect the economy to continue growing at last year’s explosive pace.

Nonetheless, January’s unusually large gain in the government’s index of leading indicators may even “have more of an impact than is warranted,” Manchester said. “A figure that large is bound to attract a lot of attention” and should provide a shot of confidence to stimulate business activity, he observed.

The biggest gain in the monthly report was in manufacturers’ orders, one of the 11 measurements that provide an early sign of general trends in business activity. Other key components of the index that rose included stock prices, money supply, the amount of money borrowed and the formation of new businesses.

January’s advance was the biggest for the index since a rise of 1.9% during June, 1983. Since last June, the pattern has been uneven, with the index rising in three months and declining four times.

For all of last year, the nation’s output of goods and services grew by a hefty 6.9%--the biggest annual gain since 1951--largely because of a spectacular economic performance during the first six months. Since June, however, business has expanded at a more moderate rate.

4% Growth Rate Seen

This year, many independent economists, as well as those within the Reagan Administration, say that they expect a healthy, if unspectacular, growth rate of 4%.

“The underlying fundamentals are strong,” said James Christian, chief economist for the U.S. League of Savings Assns. “If the economy is not strengthening, it is at least (already) strong.”

However, Christian joined many other analysts in warning that the recovery faces serious pitfalls, including unprecedented budget and trade deficits and a strong dollar that pulls in imports while making it hard for American goods to compete abroad.

“We are sailing in uncharted waters,” Christian said.

Higher Interest Rates

Without action by Congress, the federal deficit apparently will hover near $200 billion a year for the near future, economists note--threatening to drive interest rates to dangerously high levels as the Treasury competes for funds with individuals and corporations.

No imminent threat looms because billions of dollars in foreign capital are flowing into the United States, thereby averting any credit crisis. However, Christian said that this nation has not been so dependent on foreign funds for investment since the 1880s, when money from Europe helped finance a massive railroad building boom.

James Cypher, an economics professor at American University, expressed concern that the promising monthly government figures may be fueled by speculation--and, therefore, may be misleading about the health of the economy.

“There has been a lot of speculation in the last couple of years,” said Cypher, who asserted that the boom in the stock market “and the real economy are only tangentially related.”

Tax Shelters Cited

He said that in the construction business, for example, many shopping centers and offices are being built because they are attractive tax shelters--not because a genuine economic need exists.

“This is all reflective of a wave of speculative euphoria,” Cypher said.

Most observers are sanguine about the economy’s health. Although massive deficits are menacing, it should be possible to “make it through the next two years without a full-fledged recession,” said analyst Robert Wescott of Wharton Econometrics, a Philadelphia-based consulting and forecasting firm.

“We believe inflation will remain low. That will mean the Federal Reserve won’t have to pursue a tight monetary policy, and this will keep the expansion going,” Wescott said.

Keeping Spigot Open

If the Federal Reserve allows the money supply to grow at a moderate pace, interest rates will remain nearly stable, encouraging the sales of homes, cars and other goods dependent on borrowed funds. Corporations seeking to buy new equipment and build new facilities also will be able to borrow money without strain if the Fed is sufficiently confident to keep the money spigot open, economists believe.

The index of leading indicators, which uses a base of 100 in 1967, reached 166.7 in January, the Commerce Department reported. Only three of the 11 components pointed to a slowing economy: contracts for factories and equipment, changes in the prices of sensitive materials and the length of the average workweek.