Key Economic Indicators Rise 1.1% in July : Officials Order Probe of Possible Data Leak

The government’s main barometer of future economic activity jumped a strong 1.1% in July, the Commerce Department reported Thursday, a report seen by economists as a good sign that the economy, however sluggish, is not about to tip into a recession.

At the same time, Commerce Department officials, disturbed by reports that the increase had been rumored in financial markets the day before, ordered an investigation into a possible leak of the confidential data--the second such incident in as many weeks.

But economists were generally not surprised by either the rumors or by Thursday’s report. The 11 measures that make up the index of leading indicators are publicly available, and the computers of at least one institutional economist hit on precisely the 1.1% figure in the days before the report was officially released.

June Revised

The key factors in the upsurge were a sizable monthly increase in the money supply and a rebound in new business formations, which more than offset July’s slump in the stock market.

However, the leading indicators for June, earlier reported to have been up 0.3%, were revised sharply downward to a negative 0.4%. Commerce Department analysts attributed the shift to a relatively steep 0.5% drop in inventories for June, an indicator that is always reported a month late.

“I think the best thing to do would be to average out the record of the last two or three months and call it a draw,” said David Wyss of Data Resources, a Lexington, Mass.-based forecasting firm. “The rise in July is a good sign. The drop in stocks is the only really negative indicator, and that loss has already been made back this month. But the rise in business formations only bounces back from negatives the previous two months.”

The outlook, Wyss said, is that “we’re certainly not pointing toward recession, but there will be no fantastic growth, either.” His firm is looking for growth at an annual rate of 2.5% to 2.75% during the second half of 1986.

Lee Ohanian, a senior economist at Security Pacific National Bank in Los Angeles, said the July report was entirely in line with expectations. Unlike Wyss, he saw the improvement in business formations and moderate increases in plant and equipment orders and in business and consumer borrowing as “improvement in real economic activity that tends to lead the business cycle.” In common with many economists, Ohanian considers the leading indicators a mediocre guide at best. “You have to look very critically at these indexes,” he said. “For instance, the best guide to future business growth is short-term interest rates, and that isn’t even included among the indicators, so I don’t really trust the index.”

However, short-term rates have headed down, which would tend to support an optimistic view of near-term business conditions.

The declining inventories in June that caused the revision downward in that month’s index are “probably in reality a good phenomenon for the economy,” Ohanian said. “It suggests that sales are improving, and it points to increased production to rebuild inventories later in the year.”

Others Had Same Figure

It was Ohanian’s staff that worked with the data in recent days and came up with the same 1.1% increase that the Commerce Department reported. But he confirmed that several securities traders on Wednesday had called in with reports that the department would report a 1.1% rise in the index.

Wyss, too, speculating on a “severe leak at the Bureau of Economic Analysis,” reported hearing similar rumors Wednesday that the index would increase “between 1.1% and 1.3%.”

Wyss also reported a market rumor Thursday that the nation’s merchandise trade deficit for July, to be reported officially by the Commerce Department today, will be $16 billion--if true, a sharp and unexpected increase over the $14.2-billion deficit in June.

Only last week, the Commerce Department inspector general, Sherman Funk, opened an investigation of a reported leak of the large revision in the second quarter’s gross national product to an annual rate of 0.6%, down from the earlier reported 1.1%. Accordingly, even though the latest rumored leak may only be coincidence, Commerce officials had no choice but to launch another investigation of the leak-plagued Bureau of Economic Analysis, spokesman B. J. Cooper told reporters.

3 Employees Targeted

“We received reports of a number that was out in the bond markets,” Cooper said. “When the number was released, and it was the same number that had been circulated, Inspector General Sherman Funk launched an investigation. It could be a leak, it could be a guess, and a lot of economic forecasting companies out there could run a model and come up with similar figures. To this point, we have a lot of rumors of leaks, but we’ve got no evidence that tells us we have had a leak from this department. But since we had the problem with the GNP, that has lent credibility to rumors that before weren’t getting credibility.”

Last July, Commerce Secretary Malcolm Baldrige announced that three Bureau of Economic Analysis employees would be fired, following an investigation of a leak of GNP data the previous September. Since then, one of the three has resigned, one is fighting dismissal and one has been reprimanded.

During that investigation, Funk’s staff reviewed about 14,000 phone calls by bureau personnel and discovered that many of them were unauthorized.