Economic Index Off First Time Since September : 0.3% Decline Had Been Widely Expected Following 2 Months of Sharp Gains

The government’s chief economic forecasting gauge dropped 0.3% in February after posting sharp gains during the previous two months, the Commerce Department said today.

February’s decline in the department’s index of leading economic indicators was the first drop since a similar dip last September and the largest since a 0.8% drop last July.

It was in line with widespread expectations that the economy will slow this year.

The leading index, designed to foretell economic activity six to nine months into the future, had advanced 0.6% in December and 0.7% in January after vacillating during much of 1988.

With labor markets tight and factories operating close to peak capacity, analysts say, some slowdown is needed to keep the economy from overheating and inflation from spiraling.

However, analysts are divided over whether the Federal Reserve Board can successfully engineer a controlled slowdown that restrains economic growth just enough to ease inflation without causing a recession.

The Fed for a year has been pushing up interest rates in order to relieve inflationary pressures and it intensified those efforts after sharp price increases were recorded in January and February.

Irwin Kellner, chief economist for Manufacturers Hanover Trust Co. in New York, said in advance of today’s report that the jagged behavior of the leading index suggests that “the economy has been slowing down from its overheated pace and that the economy is continuing to slow down as we work our way into the second quarter of 1989.”

Kellner said that despite the Federal Reserve’s efforts to prolong the life of the economic expansion even as it restrains growth, “the odds are growing each day” that the central bank will push the nation into a recession.

In February, eight of the 11 indicators that make up the leading index declined, with the biggest negative factor being a drop in manufacturer orders for new plants and equipment.

The other negative factors were a drop in building permits, a decline in manufacturers’ orders for consumer goods, a contraction in the money supply, a dip in an index of consumer expectations, an increase in initial claims for unemployment benefits, faster vendor deliveries to companies signaling slower demand and a decline in manufacturers’ unfilled orders.

Two indicators made positive contributions: an increase in prices for raw materials indicating stronger demand, and rising stock prices.

One indicator was unchanged last month: the length of the average workweek.