Corrections--or Real Cooling? : Leading Indicators, July Orders for Manufactured Goods Drop

The government’s main barometer of future economic activity fell a steep 0.8% in July and orders for manufactured goods plunged 3.5%, the Commerce Department announced Tuesday in reports suggesting that the economy’s recent torrid growth may be cooling.

But economists, still worried by recent signs of accelerating inflation, cautioned that both reported declines amounted to corrections of large increases in both measures a month earlier. In June, the index of leading economic indicators spurted an unusually strong 1.4%, while June orders for manufactured goods surged 5.4%, the largest such increase in 17 years.

The July swing was widely anticipated in financial markets, where the news was received calmly. The declines, said economist David Wyss of the Data Resources research firm in Lexington, Mass., “were what the markets wanted to hear and what the Fed wants to hear.”

The Federal Reserve Board has been increasingly active in forcing up interest rates to cool economic growth and dampen inflation, and last week’s report that the nation’s economy had grown at an annual rate of 3.3% in the spring had raised fears that the expansion might spin out of control.

Tuesday’s economic news may calm some of those fears. But, said Robert F. Wescott of Alphametrics, a Philadelphia economic forecasting firm, “the Fed right now needs two or three signals that growth isn’t getting out of hand. . . . This could be one of those signals, but only a weak one.”

Indeed, while seven of the nine available economic indicators declined in July, the largest negative was a 0.4% increase in the index that measures weekly unemployment insurance claims, an increase that economists dismissed as fleeting.

The Fed, in deciding whether to take further steps to curb inflation, is expected to focus more heavily on the Labor Department’s report on job growth in August. That report, due Friday, is expected to show about 250,000 new payroll jobs, about the monthly average so far this year.

“The truth is,” Wescott said, “(Fed Chairman Alan) Greenspan loves data, and he no doubt finds the leading indicators interesting, but not crucial. He’s much more concerned with real statistics, like unemployment, wage costs and price changes.”

Added Allen Sinai of Boston Co. Economic Advisers: “The odds are that the leading indicators will be up next month.”

The report Tuesday of plunging factory orders in July after dramatic June increases was not seen by economists as representing a trend. Unpredictable components such as orders for defense products and large-batch orders such as civilian aircraft make the month-to-month factory orders figures particularly volatile.

In the report Tuesday, the Commerce Department said defense orders plunged 46.6% in July, a huge swing but one seen as an expected correction of the massive 68.3% increase in the category in June. Similarly, orders for transportation equipment, military and civilian, fell 22% in July after a 33.3% increase the month before.

Excluding the defense category, factory orders in July slumped a much less dramatic 0.7%. And the category of nondefense capital goods, a useful indicator of investment in future business growth, marched ahead 0.9% in July, after an unusually large 12.5% increase in June that was inflated by large orders for civilian aircraft.

One Indicator Up

One leading indicator showing a rise in July was prices for key industrial materials, up a tiny 0.05% in a category that has been advancing since the beginning of the year. Another category, the average manufacturing workweek, was unchanged at a historically high 41.1 hours for factory employees. Declining categories reflected fewer new orders for consumer goods, a drop in new building permits, a shrinking money supply and a lower stock market.

Economists observed, without much concern, that the leading indicators have declined in two of the three most recently recorded months and have been roughly flat over that period. The index in July stood at 192.1% of its 1967 base of 100, according to Tuesday’s report, a shade below the 192.5 recorded at the end of April.

“The underlying story is that the economy is on an even keel, with slower growth in the second half of the year than in the first,” summed up Wescott. “The message is moderation.”