Reports Point to Continued Slow Economy
The government’s main barometer of future economic trends rose a strong 0.7% in May after a two-month decline, but the nation’s merchandise trade deficit soared to $12.7 billion, the second highest ever, the Commerce Department said Friday.
Taken together, the reports suggest that the economy will continue to drift in a slow-growth pattern--with domestic manufacturing continuing to slump as imports surge--at least for the foreseeable future, economists said.
“There’s no revival in sight for the industrial side of the U.S. economy,” said analyst Allen Sinai of Shearson Lehman Bros. Robert T. Parry, chief economist for Security Pacific National Bank in Los Angeles, agreed, saying the reports “point to a weaker economy than we had been expecting.”
Moreover, these statistics may force the Commerce Department’s recent second-quarter “flash” estimate of 3.1% growth in the economy to be revised significantly downward, perhaps by as much as half a percentage point, Sinai and Parry said.
To a large extent, the good news found in the 0.7% rise last month in the index of leading indicators was more than tempered by downward revisions in the index for the previous two months. The revised index fell 0.6% in April and 0.1% in March, the department announced.
The trade deficit, meanwhile, provided bad news for trade and manufacturing, as it rose sharply from $11.8 billion to its highest level since a record of $13.8 billion was set last July. In part, the leap was caused by a drop in agricultural exports, combined with a broad increase in imports of manufactured goods. Imports last month totaled $30.1 billion--the most since last July’s $32.9 billion--while exports fell to $17.4 billion, the lowest since February, 1984.
“We need further declines in the value of the dollar and faster economic growth abroad to halt the deterioration in the trade deficit,” Commerce Secretary Malcolm Baldrige said in a statement. He estimated that the deficit this year, now well ahead of last year’s record pace, would total between $140 billion and $150 billion.
And Jerry F. Jasinowski, chief economist of the National Assn. of Manufacturers, said: “The trade deficit continues to be an economic disaster, because it is eroding our industrial base.”
Baldrige called the gain in the index of leading indicators “welcome news” but pointed out that the average rise in the index since the beginning of the year falls short of the gains needed to maintain overall economic growth at 4%, the Administration’s target rate for 1985.
Roger Brinner, senior economist at Data Resources Inc. in Lexington, Mass., said his forecasting firm now looks for only 2% overall growth during the next four quarters and pointed to Friday’s reports in explaining why.
The virtual plateau in the leading indicators--overall, gains have been offset by losses--"is consistent with an economy that has made little progress in the past year,” Brinner said. He added: “The reason is the trade deficit. Imports now capture 50% of the growth in spending over the past year, and as you look ahead, it seems the import problem will become big enough for spending to be hurt too.”
Money ‘Won’t Be There’
He noted: “The average American householder may like the low prices the strong dollar gives him, but in time he’s going to find himself working shorter hours and learn that his neighbor has been laid off. Eventually, the money to spend on those low prices won’t be there.”
The biggest gain in the index occurred in raw material prices, followed by changes in the average workweek, money supply, stock prices, building permits, plant and equipment contracts, weekly unemployment claims and new orders for consumer goods. Net business formation declined, while vendor performance was unchanged.
Sinai attributed most of the positive components in the index to robust financial markets, not to underlying economic strength, noting that the stock market was strong and the nation’s money supply surged during May.