The government reported Wednesday that its chief economic forecasting gauge dropped 0.3% in February, corroborating other signs of a slowdown in the economic expansion.
Last month’s decline in the index of leading economic indicators, a composite of forward-looking business statistics, was matched by a comparable dip last September and was the biggest drop since a fall of 0.8% last July.
The 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.
Analysts said February’s decline was consistent with other recent signals that the economy may be losing steam--welcome news to those who say growth must slow to keep inflation from spiraling.
“This should reduce concern about the economy overheating, while the decline is not sharp enough to give any signal of a recession,” said Jerry Jasinowski, chief economist for the National Assn. of Manufacturers.
Others, however, are concerned that the economy will slow too much and that the Federal Reserve Board’s yearlong campaign to raise interest rates and dampen inflationary pressures will stifle growth altogether.
“The monetary tightening that we have experienced and some monetary tightening that is probably still to come are going to cause a downturn,” said economist Bruce Steinberg of Merrill Lynch & Co. in New York. “I think that we’re going to have a recession by the end of the year.”
Steinberg said Fed policy-makers are “doing what they have to do” to cure inflation, with a recession likely to be the unintended side effect.
Last month’s drop in the leading index added to a series of government reports on the economy’s performance in February that pointed downward, including decreases in manufacturing employment, housing construction and orders for durable goods.
Economist John Hagens of the WEFA Group in Bala-Cynwyd, Pa., said the latest decline in the index was not enough evidence to signal a future recession, but is “consistent with our view that we are going to have a period of prolonged slowing of growth beginning in the second half of this year and carrying through the first half of next year.”
Whether the slowdown turns into a recession will depend on how deftly the Fed maneuvers as it tries to slow growth just enough to bring inflation under control, Hagens said.
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 work week.
The government’s chief economic forecasting gauge dropped 0.3% in February
Source: Department of Commerce