The Economy : Hike in Key U.S. Index Eases Recession Fears

The government’s chief economic forecasting gauge jumped 0.8% in April, the Commerce Department reported Wednesday, easing fears that the nation might be about to tumble into a recession.

The increase in the index of leading economic indicators followed declines of 0.3% in February and 0.6% in March. Three consecutive monthly declines have traditionally been a signal of a possible recession on the horizon.

“We believe there will be a slowdown that is gradually occurring in the economy, but it’s not going to ultimately end in a recession,” said economist John Hagens of the WEFA Group in Bala-Cynwyd, Pa. “It was a bit too premature to call for a recession later this year based on the data in February and March.”

Still, analysts were not suggesting that the strong numbers for April meant a robust economy this summer.

Bruce Steinberg of Merrill Lynch Capital Markets in New York said the report suggests that although there “was a bit of a rebound in April from March, the general story about the economy is that it is slowing down and slowing dramatically.”

Although a three-month drop in the index has preceded all eight recessions since 1948, there have also been five similar series of declines--including the five consecutive months surrounding the stock market crash in October, 1987--that were not followed by recessions.

Fairly Steady Slowing

The index of leading indicators is designed to foretell economic activity six to nine months in the future.

Robert Brusca, an economist with Nikko Securities Co. International in New York, said recent reports show that “the economy is confused, somewhere between boom and bust.”

But he noted that over the past six months “there’s been some pretty steady decelerating in the growth of the index.”

Commerce reported that the leading indicators rose 1.3% over the past six months, compared to 1.7% in the previous half-year.

The April report showed that eight of the 11 indicators in the index rose, led by increased manufacturers’ orders for consumer goods, increased building permits and a longer average workweek.

Other pluses were higher stock prices, lower initial claims for jobless benefits, slower vendor deliveries (meaning growing demand), more orders for plants and equipment and an increase in manufacturers’ unfilled orders.

On the minus side were the third consecutive drop in an index measuring consumer confidence, a drop in the money supply and lower prices for sensitive materials, indicating slower demand.

Hagens said he was closely watching the consumer confidence index.

“That has been a fairly good leading indicator on its own of a recession,” he said. “It hasn’t dropped nearly enough to indicate that a recession is coming, but if it dropped dramatically over the next three or four months, we would be concerned.”

Heading for Soft Landing

Instead, Hagens concludes that the “economy is in a slowing mode,” heading for a soft landing with growth over the next year of 1.5%. Growth in the gross national product for the first three months of 1989, with the statistical rebound from last year’s drought removed, was 1.8%.

Robert Dederick, chief economist for Northern Trust Co. in Chicago, also sees “a soft landing--continued but subdued growth.”

A soft landing, rather than a recession, is what the Federal Reserve hopes to achieve in its effort to contain inflation by tightening credit.

William K. MacReynolds, U.S. Chamber of Commerce forecasting director, said he believes that “it would be a mistake to interpret April’s uptick . . . as an indication that the economy is in good shape.”

“Persistent declines in the money supply . . . are a harbinger of a more dramatic slowdown than most analysts expect,” he said. “Historically, a falling money supply has led to a large decline in overall economic growth.”

The drop in the money supply in April was the fourth in a row.

The April index of leading economic indicators stood at 145.7% of its 1982 base of 100.