Economy Rises Solid 0.7%, Leading Indicators Show

The government’s main economic forecasting measure rose a solid 0.7% in August, the Commerce Department reported Monday, providing another sign that the economy is returning to a pattern of growth after a year of virtual stagnation.

The rise in the index of leading indicators was the fourth consecutive increase and the seventh in the last eight months, leading the Reagan Administration to reassert its forecast of booming growth for the latter part of the year. In addition, the department revised upward the gain in the July index, from 0.4% to 0.7%.

At the White House, spokesman Larry Speakes called Monday’s report “further evidence that a rapid improvement in economic performance is under way in the second half.” He added: “With unemployment falling, housing starts booming, personal income on the rise and inflation below 3%, the U.S. economy continues to show the world what can be accomplished.”

Private economists cautiously agreed that the economy began to pick up speed this summer after an anemic growth rate of about 1% from January through June. But they dismissed as overly optimistic the Administration’s forecast of the year-end surge that would be needed to pull the growth rate up to its prediction of 4% for all of 1985.

“I wouldn’t go along with the Administration claim that the economy is going into a phase of accelerating growth,” said Robert Gough, vice president of Data Resources Inc., a Lexington, Mass., forecasting firm. “But we will be on a plateau of modest growth.”

Gough cautioned that some of the rising components among the August leading indicators contained anomalies: For example, he noted, an increase in new orders was caused primarily by a late-summer surge in auto sales, in turn accelerated by concessional rates on car loans. In addition, new building permits surged because of a drop in mortgage interest rates, he said.

At the same time, Gough said, “the Fed has been pumping money into the system” to such an extent that growth in the money supply was the largest single component of the August increase.

He said that, if the Federal Reserve Board, which meets today to chart policy, decides to keep money flowing well above growth targets to help limit the dollar’s strength, then crucial interest rates will probably remain stable and not inhibit future growth.

Private Debt Burden

But the current rate of consumer spending is swelling the burden of private debt to the point that growth may well stall next year, Gough cautioned. The debt, he said, “is going to be a constraint come the first of the year. After the Christmas shopping season, that debt burden will have to be corrected.”

Allen Sinai, chief economist of Shearson Lehman Bros., agreed that the recent record of increases in the leading indicators “means better growth. But, on a sustained basis, the Administration and the Fed are likely to be disappointed.”

The probability of a lower dollar and the possibility that interest rates have stabilized for now at lower levels “tells us that we will do better than the 2% (growth) of the past 12 months. The issue is, how much better?” Sinai asked.

The National Assn. of Business Economists added another tempering note Monday by reporting on a survey of 350 members of the group who foresee modest growth at best in the next year.

Budget Deficits Cited

The business economists, citing the huge and intractable federal budget deficits as a continuing inhibiting factor, predicted growth for 1985 at a weak 2.2%, followed by only 2.8% growth in 1986. Just over half of the survey participants, 52%, said a recession is likely by the end of next year.

Besides money supply, building permits and new orders, the Commerce Department reported that other positive August indicators included a slowdown in claims for unemployment benefits, the formation of more new businesses and a lengthening of the average workweek.

Negative indicators included declining stock prices and outstanding credit, lower raw material prices and speedier deliveries of goods. Another indicator, orders for factory equipment, was unchanged.