Drop in Key Economic Index Discounted : Leading Indicators Called Distorted by Fluke Workweek Figures

The government’s chief gauge of future economic activity showed the biggest drop in two years last month, the Commerce Department reported Friday, but economists said the downturn was exaggerated by a quirk in the numbers.

The 0.6% decline in the index of leading economic indicators “definitely suggests sluggishness,” Merrill Lynch economist Martin Mauro said. “But it probably overstates the extent of the deterioration,” he added, “because 0.5% of the drop came from a decline in the factory workweek during the Passover and Good Friday religious holidays,” when some people take off from work.

Wrong Time for Survey

“It shows you shouldn’t take an employment survey during a religious holiday,” Donald Ratajczak, director of the Georgia State University economic forecasting project, concurred.

The 0.6% drop in April followed a 0.8% rise in March and a 0.4% gain in February. The plunge was the steepest since April, 1985, when the 11 indicators fell 0.5%.

Indicators showing declines were the average workweek for production workers, the number of building permits, new orders for manufactured consumer goods and prices for 500 common stocks. The average workweek shrank by half an hour to a total of 40.5 hours.

Positive factors in the index included a decrease in the average number of new unemployment insurance claims; a downturn in the ability of vendors to deliver orders, indicating increased demand; a change in sensitive materials prices, and an increase in the money supply.

Some Data Not Available

The number of contracts and orders for plants and equipment hardly changed for the month, and figures were not available for two other indicators: changes in inventories and changes in business and consumer borrowing.

“Probably of most concern is the weakness in new orders for consumer goods and in contracts and orders for plant equipment,” Mauro said. “That suggests softness in the capital goods industries.”

Mauro predicted that the index would show a “small increase” for May, with the average workweek “bouncing back” and other components registering a “slight gain.”

To Ratajczak “the indicators are saying the economy is stalling but it is not slumping at this point. There’s not a recession ahead, but obviously there’s not vigorous growth ahead, either.

Index Called Flat

“Basically,” he continued, “there weren’t any significant areas of strength last month. Once you take out the 0.5% decline in the workweek, you’re looking at a flat index. That’s not good, but it’s not as bad as the minus 0.6% indicates because we’ll get a rebound in the workweek in May.”

Meanwhile, Commerce Department officials said the index of leading indicators is likely to be changed by the end of the year. Components involving automobile sales, housing and bond rates may be added, and several current indicators may be revised in an effort to provide a more accurate signal of coming changes in the business cycle.

It would be the first major change in the index since 1975.