.8% Drop in Economic Indicator Seen as Pause in Growth Boom

The government said today that its chief forecasting gauge of future economic activity dropped 0.8% in July, the sharpest decline in eight months.

Economists said the drop in the Commerce Department’s Index of Leading Economic Indicators may be a signal of a pause in what has been booming economic growth this year. But they cautioned against reading too much into a single month’s figures.

The July decline was the biggest since last November, when the index dropped 1.0% in the wake of the October stock market crash.

The latest drop was likely to be seen as good news by the stock and bond markets, which have faltered in recent weeks on fears that inflation is heating up.

But the dip follows a 1.4% jump in the index in June, the biggest increase in 18 months. The Commerce Department revised its estimate for May, calculating now that the indicators were off by 0.7% instead of the previously reported 0.8%.

The government said last week that the U.S. economy, as measured by the gross national product, grew at an annual rate of 3.3% in the April-June quarter, following a 3.4% expansion pace in the first three months of the year.

This strong growth has raised concern at the Federal Reserve Board, which is charged with keeping inflation under control.

The Fed has been pushing up short-term interest rates since late March in an attempt to slow growth to a sustainable, non-inflationary pace. On Aug. 9, it took its most dramatic inflation-fighting move by raising the discount rate, its key bank lending rate, by half a percentage point.

Since then, analysts have been watching government economic statistics closely for indications of whether the Fed has tigtened enough.

In July, the weakness in the leading indicators was widespread, with seven of the available nine components registering declines.

The biggest drain came from an 11.3% jump in unemployment claims. That was followed in order of severity by a drop in new orders for consumer goods; a decline in building permits; a speedup in business deliveries, considered a sign of slackening demand; a drop in the Standard & Poor’s index of 500 stocks, a contraction of the money supply and a drop in plant and equipment orders.

One indicator, a rise in prices for raw materials, was read as a sign of economic strength. The length of the average workweek was unchanged in July.

Michael Evans, a private economic forecaster in Washington, said he expected GNP growth will likely slow to an annual rate of 2.5% in the second half, closer to what the Federal Reserve considers sustainable without quickening inflation. He said growth in U.S. exports and increases in investment spending by businesses will likely slow from the torrid pace earlier this year.

In another report released today, the government said orders to U.S. factories for manufactured goods, dragged down by a sharp decline in military orders, fell 3.5% in July, the steepest decrease in 18 months. The steep drop was anticipated by economists, who had said some rebound from a large increase in June was likely.