Economic Index Posts 3rd Decline in 4 Months : 0.6% Drop Is Offset by Gain in Revised Figures for December; Mixed Signal on Recession Seen

The government’s main barometer for future economic activity dropped a relatively steep 0.6% in January, the third decline in the last four months, the Commerce Department reported Tuesday.

The drop in the index of leading economic indicators was impelled by January declines in building permits and orders for consumer goods and by a slight increase in unemployment claims.

However, the decrease was offset by an unexpectedly strong upward revision in December’s index from a previously reported drop of 0.2% to an increase of 0.3%.

‘Non-Recession Year’

“It’s another indication that this will be a non-recession year for the U.S. economy,” said Allan Sinai, chief economist at the Boston Co.

But David Wyss of Data Resources Inc. of Lexington, Mass., which expects very slow growth this year, instead saw the January drop and the December revision as “a mixed signal suggesting that the outlook for the economy is mixed, also.”

Without the December revision, the index would have declined four consecutive months, a strong downward trend that in the past has been interpreted as a sign that recession is near.

“The numbers are telling us that the economy this year will be a different animal than in the past four years or so,” said Irwin L. Kellner, chief economist at Manufacturers Hanover and a strong believer that there will be a recession in 1988. “This is consistent with our expectations that gross national product will decline this quarter.”

Construction Spending Down

In a separate report Tuesday that likewise suggested a cooling economy, the Commerce Department said that spending on new construction in January plummeted 2.9%, the biggest drop since last March, when it fell 3.3%. The January decline also followed an upward revision in December, when construction spending is now reported to have increased 0.4%.

The index of leading indicators consists of 11 economic measures, including stock market prices, the money supply, unemployment insurance applications, costs of industrial materials, building permits, goods orders and plant and equipment orders.

In most months, however, two important measures--business and consumer credit and inventories--are not available, so the index is almost always revised. The December measure was thus revised substantially because inventories were large and business credit demand was high.

Those uncertainties hang a large question mark on the often-cited belief that three or more consecutive monthly declines signify a coming recession. Sinai noted that since the late 1940s, when the index was devised, it has been down three or more consecutive months about a dozen times, while there have been eight expansion-recession cycles in that time.

On the other hand, the index fell four consecutive months early in 1980, correctly foretelling the short, sharp recession of that year. And it fell again for three months during the winter of 1980-81, then for six months in a row in mid-1981 and for another three consecutive months the next winter--amply reflecting the deep recession that occurred then.

Recession May Be Here

Kellner said he believes that the decline reported Tuesday, along with the strong negative signals that followed the October stock market crash, predict a recession so imminent that we may already be in it.

Other economists, who expect no recession this year, argue that expanding U.S. exports will offset an expected decline in domestic consumption.

Sinai, warning that the big revision in the December index “makes it clear that this series is very volatile and is less reliable than it should be,” predicted another upward swing in the February index, propelled primarily by a stronger stock market, a larger money supply and improved business activity generally.