Lead Index Plunges 0.7% During March : Indicators Mark Second Straight Decline, Sparking Debate on Recession Possibility

The government’s chief economic forecasting gauge plunged 0.7% in March, the second straight decline and the biggest drop in eight months, the Commerce Department said today.

It was the first time the index of leading economic indicators, which dropped 0.3% in February, had posted back-to-back declines since it fell for five straight months from September, 1987, through January, 1988, the months surrounding the October stock market crash.

Analysts said the latest negative signals from the leading index are in line with signs that the U.S. economy is losing steam and with widespread expectations that the slowdown will become more pronounced as the year progresses.

The debate among economists is whether the end result will be an outright recession or a so-called “soft landing,” in which growth slows just enough to relieve inflationary pressures without bringing a halt to the expansion.

Statistical Quirk

The economy expanded at a strong 5.5% annual rate during the first three months of the year, but the growth in the gross national product was a more modest 3%, discounting a statistical quirk reflecting the bounce back from last year’s drought.

That was down somewhat from the drought-adjusted 3.5% pace for the final quarter of 1988. Monthly reports on the economy’s performance in February and March suggested a progressive weakening during the first quarter.

“The underlying growth rate in the economy is much below last year and the risks of a recession certainly are higher,” said economist Sandra Shaber of the Futures Group in Washington. “To be a prudent planner, you have to take those risks into account.”

March’s decline in the leading index, which is designed to predict economic activity six to nine months into the future, was the biggest falloff since a 0.8% drop last July.

False Recession Signals

The traditional signal of a recession is three straight declines in the index. However, it has flashed two false recession signals since the 1981-82 economic downturn, one of them in the months after the stock market crash.

In March, nine of the 11 indicators that make up the leading index declined, with a drop in building permits counting as the biggest negative factor.

Other negatives were: a dip in manufacturers’ orders for consumer goods; a shorter average work week; an increase in initial claims for jobless benefits; a drop in an index measuring consumer confidence; faster vendor deliveries, signaling slower demand; a contraction in the money supply; a decline in manufacturers’ unfilled orders, and falling stock prices.

Two indicators made positive contributions: a jump in prices for raw materials, indicating stronger demand, and a gain in orders for new plants and equipment.

Pushing Up Rates

The Federal Reserve Board for a year has been pushing up interest rates in an effort to restrain economic growth and control inflation. The goal of the anti-inflation campaign is to prolong the economic recovery, but some analysts think that the unintentional result will be a recession.

“The leading indicator is just another indicator of how the economy has slowed down,” said Irwin Kellner, chief economist for Manufacturers Hanover Trust Co. in New York. “We’re at a point now where if the Federal Reserve doesn’t back off, the slowdown could very easily become a recession by or before the end of the year.”