Economic Index Off Third Month; Banks Cut Prime : Economists Split on Sign of Recession

The government’s chief economic forecasting gauge fell for a third consecutive month in December, the traditional, but not infallible, signal of an impending recession.

While some economists said today that the three downturns were indeed foretelling an end to the record five-year peacetime expansion, other analysts disagreed, contending that 1988 will feature slower growth but no outright downturn.

Shortly after the report was released today, many major U.S. banks cut the prime lending rate by a quarter point to 8.5% in response to further signs of weakness in the economy. The prime rate cut, led by Morgan Guaranty Trust Co. of New York, was the first since November and the third since the October stock market crash.

It came amid speculation that the Federal Reserve, the U.S. central bank, might ease its grip on the nation’s money supply and lower its 6.0% discount rate to keep a sluggish economy from sliding into recession.

Other big banks, including Citicorp, Chemical New York, Manufacturers Hanover and Bank of America quickly followed Morgan’s lead.

Added Significance

The Commerce Department’s Index of Leading Economic Indicators has taken on added significance since the record 508-point decline in stock prices which occurred on Oct. 19.

The 0.2% December decline in the index followed a sharp 1.2% November drop, which had been the biggest setback in more than six years, and a smaller 0.1% decrease in October.

Since the leading index was created in 1948, it has fallen for three consecutive months a total of 12 times. In eight of those instances, a recession followed. The other four times economic growth slowed but there was no recession.

The last time the index declined three months in a row was from June through August in 1984. No recession followed, although the economy entered a two-year period in which growth slowed as a soaring trade deficit robbed American manufacturers of sales.

Some economists insisted that the leading index was signaling an actual recession, which they said had been triggered by a loss of consumer confidence after the collapse of stock market prices.

‘How Long and How Deep?’

“The question now is not whether we are in a recession, but how long and how deep it will be,” said Irwin Kellner, chief economist of Manufacturers Hanover Trust.

Michael Evans, head of a Washington forecasting firm, said he also believes that the recession has begun, noting a second economic report today showing that sales of new homes fell in December for the second consecutive month.

The Commerce Department report said home sales fell 6.2% in December, the biggest setback in seven months.

But Lyle Gramley, chief economist of the Mortgage Bankers Assn. of America, noted that two of the three declines in the leading index were very small and could well be revised upward to show increases in coming months when new data is available.