U.S. Reports Leading Indicators, New Home Sales Up Moderately in August
The government’s chief forecasting gauge of future economic activity rose a moderate 0.4% in August, suggesting to analysts that growth will continue through next year, but at a slower pace.
The gain reported Friday in the Commerce Department’s index of leading economic indicators follows a 0.6% drop in July and a 1.5% jump in June.
“I think the index is telling us that . . . we ought to get through 1989 without a recession,” said Cynthia Latta, an economist with Data Resources Inc. in Lexington, Mass. “I think it also tells us, if you look at the last few months together, that the economy will be growing more slowly by next year.”
The index is intended to predict economic activity six to nine months in advance, but analysts caution against drawing firm conclusions until a clear pattern is established over three months.
In another report, the Commerce Department said new single-family homes sold at a seasonally adjusted annual rate of 713,000 units in August, up 0.1% from July and the same as in June.
It was the best three-month performance since February-April, 1987, when long-term mortgage rates dipped below 9% and spurred a housing sales boom.
Most economists agree that growth, as measured by the gross national product, will slow from the robust 3.2% annual pace of the first half of this year.
They differ, however, over how much and how soon. The Federal Reserve Board, which has been pushing up interest rates since late March in an effort to curb inflationary pressures, believes a 2% to 2.5% growth rate is sustainable without inflation.
An increase in unemployment in August coupled with lackluster retail sales and sluggish growth in personal income all pointed to a welcome cooling. However, a big increase in orders of manufactured goods and now the leading index indicate that August may represent, at best, a pause in growth.
“I think this concern that seemed to be developing from a lot of the early August data that the expansion was running out of gas was somewhat premature,” said Robert G. Dederick, chief economist for Northern Trust Co. in Chicago.
“It was only a moderate increase, but . . . we’ve reached a point that if the indicators are very strong, we’d be sitting here chewing our nails, worrying about inflation. . . . The fact that these (indicators) are not moving up strongly is probably favorable,” he said.
Unemployment Claims Drop
Dederick said the economy likely has not slowed enough to satisfy the Federal Reserve, which he said probably would nudge interest rates higher late this year or early next year.
Five of the available nine components of the leading index contributed to the increase in August, while four detracted from it.
The biggest boosts came from a drop in average weekly claims for state unemployment benefits, from 325,000 in July to 298,000. A rise in orders for manufactured consumer goods, from $85.2 billion to $89.3 billion last month, also was a big plus.
Together, these two categories accounted for two-thirds of the positive activity. Also adding to the overall increase were rises in plant and equipment orders, in building permits and in the price of raw materials, which is read as a sign of strong demand.
Indicators making a negative contribution, in order of severity, were a decrease in business delivery times, read as an indication of slackening demand; a drop in the average workweek; a decline in the Standard & Poor’s index of 500 stocks and a contraction of the money supply in inflation-adjusted dollars.
Wrong 4 Times
The 0.4% overall increase left the index at 193.4% of its 1967 base of 100.
The leading index, since its creation in 1948, has correctly predicted all eight recessions. However, it also has falsely predicted a recession four times.
The index last declined for three consecutive months from June through August, 1984. The economic expansion slowed, but there was no contraction.
Also, preliminary estimates of the index are often revised substantially in later months. For instance, declines were initially reported for five straight months--from September, 1987 through last January. Later revisions wiped out all but two of the drops, in November and January.
