Leading Indicators Inch Up; Construction, Orders Data Augur Moderate Growth
The government Wednesday reported a 0.2% increase for April in the index of leading indicators, its main barometer of future economic activity, and revised downward to 0.2% the robust March increase of 0.8% reported last month.
The figures indicated a moderate rate of national economic growth that appeared to be more sustainable this summer than the fast 3.9% annual pace of the first quarter.
Commerce Department analysts reported separately that spending for new construction in April was virtually unchanged for the fourth consecutive month and that new orders for factory goods increased 1.2%. Both reports were further signs that some areas of domestic spending are slowing while export-driven industrial production continues to expand.
“It’s the right kind of bad news, especially from the point of view of the Fed,” said Michael Penzer, vice president and senior economist at Bank of America in San Francisco. Although the average consumer thinks that he wants the economy to boom, Penzer said, the Federal Reserve fears that the economy will overheat and should welcome the slowdown.
Boom Is Cooling
By the same token, the continuing slowdown in construction of housing and business plants, even while orders for capital equipment and durable goods continue to mount, suggests that the economy is growing at the correct pace for the trade deficit to keep dropping.
But Irwin L. Kellner, chief economist for Manufacturers Hanover in New York, warned that the Fed may “tighten too much when it ought to be more accommodative, thereby pushing the whole economy into recession.”
Kellner, a persistent bear in economic predictions despite the economy’s strong showing this year, said his own calculations for consumer spending show new construction for housing and business plants in virtual recession for the better part of a year.
Roger Brinner of Data Resources Inc., an economic forecasting firm in Lexington, Mass., said Wednesday’s reports “are consistent with our view that growth this year will slow to something like 2% or slightly less for the rest of the year, with perhaps a slight increase in unemployment by year’s end.”
Last month, civilian unemployment for April was recorded at 5.4%, the lowest rate in 14 years, a report that raised fears of a tightening labor market and wage inflation.
Last week, however, separate reports of slowing consumer spending and small increases in after-tax per-capita income during April gave an early hint that the January-March boom is cooling.
As a result, market fears of rising interest rates have fallen dramatically this week. On Wall Street, Tuesday’s explosive 74.68-point surge in the Dow Jones industrial index was followed by a solid 32.89-point gain Wednesday.
Gains in Five Sectors
The index of leading indicators for April reflected gains in five of the economic indicators and declines in four others. The increases included a strong 0.2% gain in the average workweek to 41.2 hours and a drop in average weekly unemployment claims to 296,000 from 304,000, a 0.1% gain in the index. Other gains were recorded in money supply, raw materials prices, and plant and equipment orders.
On the debit side, a weak stock market in April caused a 0.1% decline in that financial indicator. The largest negative factor was a sizable 0.4% drop in the number of companies reporting slow deliveries from their suppliers.
The two factors that reduced the March index of leading indicators from the earlier reported increase of 0.8% to the 0.2% in Wednesday’s revision were inventory accumulation, and business and consumer borrowing. In March, the credit index declined 0.4% and inventories fell just over 0.1%.
But economists observed that the indicators may be obsolete in these two categories because they are habitually reported two months late.
“The reported March declines in inventory and credit are no reason to be alarmed,” said Bruce Steinberg of the Merrill Lynch investment firm in New York.
Steinberg, noting that in today’s business climate excess debt is feared and efficient inventory management is regarded as a necessity to compete in a global market, said, “Taken together, they could lead to much better sentiment on Wall Street.”
The Commerce Department report on new factory orders for April estimated that total orders hit a new high of $218.7 billion, surpassing December’s previous high of $213.8 billion.
Orders for non-defense capital goods--an important indicator of future expansion in the industrial sector--increased a solid 1.9% after a 3.8% decline in March. April orders in this category were $33.8 billion, up 16% from April a year ago.
New construction for April was estimated at an annual rate of $401.8 billion, virtually unchanged from the $401.2-billion rate in March.
