Key Index in Sharpest Dip Since ’81 : Leading Indicators Down 1.7%; Could Portend 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 Wednesday by the Commerce Department.

In 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 Data Resources Inc. in Lexington, Mass.

Decline Matches 1984’s

The November decline in the index, which measures activity in 11 key areas of the economy, matched the plunge in July, 1984. In the wake of that decline, which was part of a sequence of three consecutive monthly drops, the economy slowed but stayed out of recession.

The last time a steeper drop occurred was in September, 1981, when the index fell 2.2% as the nation was entering a deep recession.

Typically, economists are reluctant to forecast 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 a recession in 1988. But other experts believe that a severe economic downturn is inevitable, given the sharp November plunge.

‘More Confident’ of Slump

“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 L. Kellner, chief economist for Manufacturers Hanover Bank in New York.

The stock market crash was responsible for most of the decline, and Kellner said that “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 rising 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, only nine of the 11 indicators of future economic activity were available, and seven of them declined, led by the fall in stock prices, which was responsible for 1.1% of the total decline. 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 the index 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.

Building Permits Up

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. Meanwhile, he added, housing sales and new housing starts “have been in the doldrums.”

However, other experts said the decline in seven of nine economic indicators was a random occurrence that does not suggest a recession is on the way.

Recession Discounted

“Nobody should jump the gun here and say we’ve got a recession brewing,” said Michael Penzer, a vice president and senior economist with the Bank of America. “At most, these figures suggest there may be some slowing down in the economy next year, but we still have the likelihood of strong economic growth.”

Penzer noted that the economic indicators declined for three consecutive months in 1984 without causing a recession, adding that there have been 11 separate months in which the index declined since the last quarter of 1982, when the nation’s present economic recovery began.

White House spokesman Marlin Fitzwater discounted the report as “a one-month blip on the screen.” He predicted that “the 60 months of economic recovery we have enjoyed will continue.”