Economic Indicators Take Sharp Rise, but Slump Is Predicted

The government said today its main barometer of future economic activity shot up 1.2% in November, the largest increase in seven months.

The Commerce Department said the gain last month in its Index of Leading Indicators was more than double the 0.5% rise in October and the biggest increase since a 1.2% rise last April.

Analysts, however, cautioned against reading too much into the November rise, contending that it was more a reflection of short-term economic activity than an indication of future strength.

Economists believe that while the economy is performing well, it will suffer a substantial slowdown in activity in the early part of 1987 due to an adverse initial impact by new tax laws.

Raw Materials

The biggest contributor to strength in the index in November came from a rise in raw materials prices. Those showing the biggest gains were lumber, iron and steel, aluminum and cattle hides.

Rising prices for raw materials are considered a sign of increasing demand and thus a signal of faster growth in the future.

But analysts noted that rising prices can also signal a pickup in inflation, which would be a drag on economic growth.

November was the second consecutive month that a big jump in commodity prices had been the major strength in the index. Without that price rise in November, the index would have been up a much smaller 0.7%.

Eight Indicators Rise

In all, eight of the 11 economic barometers showed strength last month. Following the rise in materials prices, the biggest contributors were, in order, a rise in stock market prices, growth in the work week, a jump in orders for business equipment, a rise in building permits and growth in the money supply. Also providing strength were a change in delivery times on business orders and a drop in initial unemployment claims.

Three barometers held back growth in the index. The biggest negative came from a drop in business and consumer credit, followed by a fall in manufacturers’ orders for consumer goods and in net business formation.

Last-Minute Buying

The 1.2% November rise was slightly higher than had been expected by private analysts. But economists cautioned that much of the growth in November reflected a last-minute buying spree on the part of businesses and consumers who are rushing to take advantage of expiring tax breaks before the new tax law takes effect Jan. 1.

Many analysts believe that the economy, as measured by the gross national product, is growing at close to a 3% rate in the current October-November quarter.

But economists believe this growth is being borrowed from the early part of 1987 and they are predicting that economic activity will slump dramatically in the January-March quarter. The most pessimistic are actually forecasting a decline in the GNP, something not seen since the last recession.

Michael Evans, head of a Washington forecasting firm, said he believed the GNP would fall at a 1% annual rate in the January-March quarter, but he said he was not predicting an outright recession, which is defined as two consecutive quarters of negative GNP performance. Evans said he believed the economy would recover and grow at a 2.5% annual rate from April through December.