Economic Index Falls 1.7%, Biggest Plunge in 6 Years : Some See Signs of Recession
The government’s chief barometer of economic trends plunged in November by the largest amount in six years, mostly as a result of the stock market crash a month earlier, according to statistics released today by the Commerce Department.
Marking the first such decline since January, the index of leading indicators fell 1.7%, a decrease that portends an economic slowdown and the distinct possibility of a recession in the months ahead, some leading economists said.
“This drop was a little bigger than anyone expected. . . . There’s a warning signal being flashed here: There’s a slowdown ahead, some danger ahead,” said David Wyss, chief financial economist for the Data Research Institute in Lexington, Mass.
The November decline in the index, which measures activity in nine key areas of the economy, was the largest since a 2.2% drop in January, 1981, when the nation was edging into recession.
Typically, economists are reluctant to predict a recession until the indicators decline for three straight months. Wyss, noting that the figures for September and October registered slight gains, said it may be too early to predict one for 1988. But other experts believe that a severe economic downturn is inevitable, given the sharp November plunge.
‘A Little More Confident’
“Those of us who have been forecasting a recession for 1988 feel a little more confident of our forecast today as a result” of the new statistics, said Irwin Kellner, chief economist for Manufacturers Hanover Bank in New York.
Even though the stock market crash was responsible for most of the decline, Kellner said “a decline in the market is always a harbinger. . . . Since 1929, there has not been a recession in the United States that was not preceded by a drop in stock prices.”
Moreover, he said, there are “telltale signs throughout the economy"--including rising inventories, declining consumer spending and increased production--"that are the classical ways a recession gets started.”
Jerry Jordan, senior vice president and chief economist with First Interstate Bank in Los Angeles, said the chances of a recession in 1988 are increasing because the government’s tight money policy and the “budget fiasco” on Capitol Hill guarantee that the economy will head into the new year in a greatly weakened condition.
In the November figures, seven of the nine indicators used to measure economic activity were down, led by the fall in stock prices, which were responsible for 1.1% of the total. Stock prices were 25.6% lower last month than in August, when the market hit its record high.
Other economic factors that contributed to the plunge in federal figures were a decline in the length of the manufacturing workweek, a slowdown in growth of the money supply, increased business delivery times on orders, rising unemployment claims, changes in raw materials prices and a fall in contracts and orders for plant equipment.
The two areas that showed improvement were manufacturers’ new orders for consumer goods and materials and building permits.
“I think the worrisome thing is that this (survey) does not just reflect the drop in the stock market, but virtually a drop across the board,” Kellner said, echoing statements by Wyss and other economists. “Only two of the components had an increase, and it’s likely they will be reversed in the December figures.”
Kellner said consumer spending overall “has been soft” this month and noted that large inventories are piling up in warehouses across the nation.