Economic Indicator Plunges 1%, Biggest Decline in 2 1/2 Years

The government’s main gauge of future economic activity plunged 1% in January, the biggest decline in 2 1/2 years, the Commerce Department reported today.

The setback in the department’s Index of Leading Indicators ended four consecutive months of increases, including a giant advance of 2.3% in December.

The large decline had been expected by economists, who said it confirmed other barometers showing that business activity slowed considerably in January after a sudden spurt at the end of last year.

In December, sales to businesses and consumers rose sharply as both groups rushed to make purchases before the new tax law took effect Jan. 1.

However, many of those sales simply borrowed from purchases that would have been made in 1987, making the start of this year look even weaker.

Factory Orders Fall

The Reagan Administration had hailed the big December rise in the index as evidence that the long-awaited rebound in economic recovery was under way. But many analysts said the January drop confirmed their belief that the economy is still mired in a period of sluggish growth.

The 1% January decline was led by a huge drop in orders for factory equipment and a fall in building permits. The decline in building permits was essentially a correction from a huge increase in December caused by a rush to take out applications in California before higher fees took effect.

In all, six of the 10 indicators contributed to the decline in the index. In addition to factory orders and building permits, the other negative contributors were a drop in orders for consumer goods, changes in raw materials prices, vendor performance and unemployment claims.

Stock Market Increases

The biggest positive factor on the index came from a steep increase in stock market prices, followed by changes in business formations, a decline in the average workweek and a drop in the money supply.

The various changes left the index at 183.8% of its 1967 base of 100.

Many analysts said they believed the index is correctly forecasting continued sluggish growth in the months ahead.

Douglas Cliggot, senior economist at the New York investment firm of Merrill Lynch, said the firm is forecasting that the economy will grow just 2.1% this year, even slower than last year’s 2.5% pace, as consumer spending registers just half the increase it did in 1986.

“We feel we are approaching a point where consumers are hesitant to continue taking on debt at the levels they have in the past couple of years,” he said.

The Reagan Administration is predicting growth will pick up substantially this year. It pins these hopes on a belief that the trade deficit, which hit a record $170 billion in 1986, will shrink by between $30 billion and $40 billion this year.

In another economic report issued today, the Commerce Department said sales of single-family houses declined 6.8% in January to a seasonally adjusted annual rate of 716,000, the sharpest drop since last October.