June Figures Also Note Inflation Threat : Indicators Point to Continued Economic Growth

The government reported Tuesday that its main barometer of future economic activity jumped 1.4% in June, but the surge was in part counterbalanced by a sharp downward revision of the index for the previous month.

Economists said the figures, in addition to reflecting the particular volatility of this economic gauge, underscore what most other economic statistics have been saying: that the economy is continuing to grow, that no recession is in sight this year, but that inflation is heating up.

The June increase in the index of leading indicators was the greatest in the past 18 months, while the revised drop for May--from negative 0.1% to negative 0.8%--was the most severe since immediately after last October’s stock market crash, the Commerce Department said.

“The basic conclusion at this point has to be that the economy is pretty solid,” said Donald Straszheim of the Merrill Lynch brokerage firm in New York. “It looks very good for the remaining months of 1988, but it looks too good for inflation and interest rates to stay where they are.”

The June figures suggested that Federal Reserve Board action to force up interest rates to counter inflation will sooner or later become inevitable, economists said.

The upward swing in June was largely anticipated by the financial markets, while May’s downward revision was caused by a drop in business and consumer credit and by smaller business inventories. The latter developments were, for the most part, welcome in an economy that has been expanding for nearly six years, in which debt has grown to unusually high proportions and in which resurgent inflation is widely regarded as an imminent threat.

The 1.4% upward move pushed the index to 194 on a base of 100 pegged to the year 1967. The new level is slightly above the peak of 192 reached just before the October crash.

Meanwhile, in another report tracking economic growth, the Commerce Department said factory orders surged 5.5% in June, the largest monthly increase in 17 years.

Orders for manufactured goods increased a strong 2.4%. Orders for durable goods jumped 9.4% and for non-durable goods a more modest 1.2%, while the key category of non-defense capital goods--the best indicator of U.S. industry’s investment spending for the near term--jumped 13.2%.

Straszheim noted the contrast between the strong showing and last fall’s fears of an economic downturn after the October crash. At the time, he said, economists were “wondering whether the economy could make the transition from consumer spending to exports and capital investment without passing through a recession.

“Now we have the answer: The transition worked terrifically, there is no end in sight for growth. Now it’s export trade and capital spending that’s strong, while consumer spending has slowed to a walk, and that’s exactly what we want.”

David Wyss, an economist with the research firm of Data Resources in Lexington, Mass., stressed that the strong June move by the leading indicators was unusually broad based, with only a single negative--orders for consumer goods--among nine categories.

A strong stock market in June contributed 0.5% among financial indicators, while increases in capital goods orders and a decline in unemployment insurance claims added positive factors.

Fluctuations Noted

“All this adds up to an indication of real strength out there,” Wyss said. “But there is also trouble out there. Materials prices were up again; commodities prices are up sharply again because of the drought, so inflation is definitely on the way up. And that means interest rates are also on their way up. The leading indicators only give a six-month look ahead, so if inflation is finally going to bring this recovery down, it won’t do it until 1989.”

Irwin L. Kellner, chief economist at Manufacturers Hanover in New York, noted that although the economy has avoided a recession, the fluctuations in the leading indicators since October have accompanied slower economic growth.

Measured by the gross national product, the economy grew at a boom-like annual rate of 6.1% in the last three months of 1987, followed by 3.4% and 3.1% growth in the first and second quarters of this year.