Index Dip Provides Fresh Evidence of Sluggish Economy

The government said today that its chief economic forecasting gauge fell in June for the fourth time in five months, providing fresh evidence that the U.S. economy is entering a period of sluggish growth.

The Commerce Department’s index of leading economic indicators dipped 0.1% in June. While the amount of the decline was small, the weakness was widespread, with seven of the index’s 11 individual indicators flashing negative signals.

The small decline had been expected by analysts, who are debating whether the economy’s slowdown will worsen into a recession.

The signal for an economic downturn has traditionally been three consecutive monthly declines in the leading index. The index, however, rose in April, breaking the string of declines.

“We are seeing a mild recession developing in the United States right now,” said Bruce Steinberg, an economist with the New York brokerage firm of Merrill Lynch, Pierce, Fenner & Smith.

Steinberg said that he believes forthcoming data will show that the economy went into a slump in the current July-September quarter and that the downturn will last until January.

But more optimistic forecasters believe the economy, while entering a sluggish period, will be able to scrape by without an outright recession, defined as at least two consecutive negative quarters for the gross national product.

The Bush Administration is even more optimistic, forecasting that GNP growth, which weakened to an annual rate of 1.7% in the April-June quarter, will rebound in the second half of the year.

At the White House, spokesman Marlin Fitzwater said of today’s report: “The weakness in the leading indicators over recent months is consistent with our view that economic growth is likely to remain relatively soft over the second half of 1989.

‘Moderate’ Growth

“It does show . . . that the economy is softening in the last half of the year. We think we’ll continue to see the economy grow but at a more moderate pace than the 3.7% and 4.4% growth for 1987 and 1988.”

The biggest drag in the index came from a decline in prices for raw materials. While that is good for the economy in that it signals lower inflationary pressures, it is considered a negative for the leading indicators because it can signal declining demand.

Other negative forces in June were a rise in weekly unemployment claims, a drop in building permits, a change in business delivery times, a drop in the length of the average workweek, a fall in orders for consumer goods and weakness in the number of unfilled orders.

Four indicators showed strength during the month, with a rise in stock prices making the biggest positive contribution. Other positive forces were a rise in consumer confidence, faster growth of the money supply and an increase in plant and equipment orders.

In the first six months of the year, the leading index has fallen at an annual rate of 2.1%. By contrast, the index rose by 4.5% in all of 1988.

After a year of pushing interest rates higher to fight inflationary pressures, the Federal Reserve reversed course in June and began lowering rates in an effort to keep the economy out of a recession.

Many forecasters believe the Fed will be able to successfully engineer a so-called “soft landing,” in which growth slows enough to dampen inflationary pressures without pitching the country into a downturn.