The government reported Friday that its chief economic forecasting gauge posted its second straight sharp gain in January, rising 0.6%, but analysts expect the strong economic picture to fade later this year.
January’s rise in the Index of Leading Economic Indicators followed a 0.7% increase in December, providing fresh evidence that 1989 opened on a strong note despite widespread expectations of an impending slowdown.
The index, designed to foretell economic activity six to nine months into the future, was up and down during much of last year.
In a separate report released Friday, the government said orders to U.S. factories for manufactured goods declined 1.3% in January, reflecting a fallback in demand for transportation equipment from record levels a month earlier. Analysts said that despite the overall decline, the report provided evidence of continued economic strength.
Excluding transportation, orders were up 0.2% in January after a 1.8% rise in December. And the category of non-defense capital goods, viewed as a barometer of future industry investment plans, rose 1.6% in January to $40.1 billion.
At the White House, Press Secretary Marlin Fitzwater said January’s rise in the index of leading indicators “shows a moderate level of growth which we believe is conducive to a healthy economy.”
However, analysts cautioned that the latest signs of robust economic activity could heighten concerns that the economy is speeding ahead too quickly to contain inflationary pressures.
That, in turn, could increase the risk of a recession by causing the Federal Reserve Board to act too aggressively as it pushes up interest rates in an effort to slow the economy and restrain inflation, they said.
“The Fed is very concerned that we’re overheating and that we’re not going to get inflation under control,” said economist John Hagens of the Wefa Group, a forecasting firm in Bala-Cynwyd, Pa. “I think there is a risk that we’ll overreact to the data and push ourselves into a recession in the latter part of this year or in 1990.”
Irwin Kellner, chief economist for Manufacturers Hanover Trust Co. in New York, said the Fed’s efforts to restrain inflation by tightening its grip on the money supply “could very easily bring on an unwanted recession.”
The Fed, for its part, maintains that its inflation-fighting strategy is designed to ensure that the next recession, when it comes, will not be severe.
January’s leading index report was the first to be released in a revised format in which the Commerce Department dropped two of 11 components from the composite index, revised two others and added two new indicators.
Eight of the 11 indicators advanced in January, with an increase in the index of consumer optimism making the biggest positive contribution.
Other factors pulling the index up were rising stock prices; increased raw materials prices, signaling high demand; a longer average work week; slower vendor deliveries to companies, indicating strong demand; an increase in manufacturers’ unfilled orders; a drop in initial claims for unemployment benefits and more orders for new plants and equipment.
Three indicators made negative contributions, including a contraction in the money supply. Other negative factors were a decline in manufacturer orders for consumer goods and fewer building permits.
The various changes left the index at 145.7% of its 1982 base of 100. Over the past 12 months, the index has climbed 5%, compared to a 1.8% gain during the previous 12-month period.
Despite the latest signs of strength in the economy, analysts continue to forecast slower growth during 1989, particularly during the second half of the year. They said January’s outlook may have been artificially boosted by mild winter weather that led to more housing and sales activity than normal.
The manufactured goods report released by the Commerce Department showed that orders for durable and non-durable products fell to a seasonally adjusted $235.8 billion in January after posting a 4.7% increase in December.
It was the first decline in factory orders since a 1.9% drop in September.
The decline was attributed to a retreat in demand for ships, tanks and planes that resulted in an 8.5% decline in orders for transportation equipment last month. The category had surged 22.1% during the previous month to a record $39.6 billion.
The motor vehicle, aircraft and shipbuilding industries all had posted large gains in December.
Defense orders, subject to wide swings depending on when contracts are signed, plunged 33.9% in January to $6.9 billion after a 24% surge in December.
For all of 1988, orders for manufacturers’ goods were up 9.7%, the best showing since 1979, after posting a 7.1% gain during 1987.
American manufacturing was bolstered by strong demand for exports in the past two years as the decline in the value of the dollar against foreign currencies made U.S. products more competitive in the international marketplace.