Key Index Drops a Sharp 0.6% but December Figure Improves : Leading Indicator Hints Slow Growth but No Recession

The government said today its chief gauge of future economic activity dropped a sharp 0.6% in January, providing more evidence the country faces slower economic growth in 1988.

The decline in the Commerce Department’s index of leading indicators came in a report that also revised December’s calculation sharply upward, to an increase of 0.3%.

The department reported a month ago that the index had declined 0.2% in December after falling in October and November.

A decline in the index over three consecutive months is the traditional, but not infallible, signal of an impending recession.

Accurate Since 1948

Since it was created in 1948, the index has correctly forecast every recession the country has had, with declines for at least three consecutive months. Thus, the revision to December was taken by economists as a heartening sign.

“The leading index shows that this is a no-recession year for the U.S. economy,” said Allen Sinai, chief economist for the Boston Co. “We will have a slower economy but no recession.”

The leading index has taken on added significance since Oct. 19, when stock prices plunged a record 508 points, eclipsing the 1929 market crash, which preceded the Great Depression.

Since October’s steep decline, however, a number of business barometers have shown strength. Even the stock market has rallied in recent weeks.

Sluggish Growth Seen

Economists are looking for the economy to slow in the first half of 1988, but they now believe that the sluggish growth will not worsen into a recession.

The 0.6% January decline was led by a big increase in new claims for unemployment benefits, which averaged 351,000 a week in January, up 12.5% from the December level. Since January, however, the weekly unemployment claims figures have been falling, further easing recession fears.

In all, five of the nine available indicators showed weakness during January. After unemployment claims, the negative factors were a drop in building permits, a decline in manufacturers’ orders for consumer goods, changes in raw materials prices and a drop in business delivery times.

Strength Shown

Four indicators showed strength during the month, with a rise in stock prices making the biggest gain. Other positive forces were the growth of the money supply, increases in the length of the average workweek and a rise in orders for plant and equipment.

The overall economy, as measured by the gross national product, raced ahead at a 4.5% rate in the final three months of 1987. But almost all of that increase came from a big buildup of unsold products.

Analysts said production will be cut back in the current quarter while those high inventory levels are worked down. Many economists think growth will slow to below 1%, with some even expecting a negative GNP growth figure from January through March.

But economists think growth will then slowly improve, allowing the economy to expand at around 2% for all of 1988, about half of the 1987 level.

“Most of the growth in the economy is going to come from exports with consumer spending and home building continuing to be depressed,” said John O. Wilson, chief economist at Bank of America in San Francisco.