Sluggish Growth : Index of Leading Indicators Rises Only 0.2% in May

The government’s barometer of future business activity rose a scant 0.2% during May, the Commerce Department reported Tuesday, indicating that the economy is likely to keep meandering at a sluggish pace.

Although lower interest rates and falling oil prices had been expected to spur business activity, economic growth has been slow, unemployment has risen and the nation’s factories have considerable unused productive capacity.

May’s increase in the government’s index of leading indicators, which foreshadows activity in coming months, was the fourth monthly gain in a row. The index has risen in 15 of the last 17 months, indicating that the economy is continuing to expand. However, its performance has fallen short of expectations.

Last month’s rise of 0.2% was well below revised gains of 1.3% for April and 0.6% during March.

President Reagan is optimistic that the leading indicators will translate into a surge in building, investing and spending during the rest of the year.

“With interest rates again dropping . . . and leading indicators still climbing, we expect strong third- and fourth-quarter growth to continue to fuel the Reagan economic expansion, now in its 43rd month,” White House spokesman Larry Speakes said.

But many private economists, more skeptical than White House officials, foresee comparatively little growth.

“The economy hasn’t yet broken out of its sluggish growth pattern,” said Lawrence Chimerine, president of Chase Econometrics, a forecasting firm in Bala-Cynwyd, Pa. “We will see several more flat months.”

Capital spending--the purchase by businesses of new equipment and factories--has been “awful,” he said. “The best we can get is a modest pickup.”

Lyle Gramley, chief economist at the Mortgage Bankers Assn., said: “I think there is still a basis for expecting some upturn in economic growth in the second half, but it will be nothing to write home about.”

The economy grew at an anemic annual rate of 2.9% during the first quarter of the year. Administration forecasters believe that a robust 4% annual rate is possible by the end of the year.

The index of leading indicators illustrated the tentative behavior of the economy. The money supply, the stock market and contracts for new factories and equipment all rose during May. But declines were recorded in the formation of new businesses and in manufacturers’ new orders for consumer goods.

Construction Spending Up

Construction proved to be a bright spot in the economy, the Commerce Department said in a separate report Tuesday. The value of construction spending in May rose to an annual rate of $374.7 billion, an increase of 0.8% from April.

The big impetus came from public construction projects, for which spending rose 5.5%. Private construction spending slipped 0.3%.

American firms have yet to reap significant benefits from the decline in the value of the dollar, which makes U.S. goods relatively cheap, compared to imported products, said Kurt Karl, senior economist with Wharton Econometric Forecasting Associates of Philadelphia.

There is a long lag, perhaps as much as 18 months, between a fall in the dollar’s relative value and a rise in domestic companies’ sales, Karl said. American firms will make gains only gradually because foreign companies raise prices slowly and reluctantly, striving to keep their share of the U.S. market.

American businesses and consumers alike are spending less for energy because of falling oil prices, and they are paying less to borrow money.

“In the past, when you had big drops in price levels and interest rates, you had a boom,” said Richard Rahn, vice president and chief economist of the U.S. Chamber of Commerce. “Why didn’t it happen this time?”

Rahn blames uncertainty about the tax laws, which are in the process of a drastic revision in Congress. Business investment is “woefully weak” because executives are hesitant to spend money until the new tax law is enacted, he said.

Manufacturing Still Weak

The manufacturing sector of the economy has been particularly weak this year. From industry’s point of view, “the economy appears to be getting weaker rather than stronger,” said Jerry Jasinowski, chief economist for the National Assn. of Manufacturers.

“Although the leading indicators have been rising continuously, much of this was due to financial factors such as the stock market and the money supply,” he said. “The real economy has been much weaker, due to the overbuilding of inventories, weak capital spending and high levels of business and consumer debt.”