THE ECONOMY : Leading Indicators Drop 4th Time in 5 Months

The government said Thursday that its chief economic-forecasting gauge declined in June for the fourth time in five months, renewing concerns that the longest peacetime economic expansion may be nearing an end.

The Commerce Department’s index of leading economic indicators edged down 0.1% in June following a May decline of 1.3%,--the steepest drop in 19 months.

The leading index still has not flashed the traditional signal of an impending recession, which is three consecutive monthly declines. Decreases in February, March, May and June were broken up by a 0.6% rise in April.

But many economists cautioned that the three-straight rule is not infallible. The steep 1981-82 recession had actually begun before the index recorded its third consecutive decline.

Some analysts said they believed that the economy is headed for a downturn, based on the weakness already shown in the leading index and various other business barometers.

“We are flirting with a mild recession,” said Allen Sinai, chief economist of Boston Co. He predicted that economic growth would decline for two consecutive quarters beginning in the first three months of 1990.

Bruce Steinberg, an economist with Merrill Lynch, said he believed that the 6 1/2-year expansion has already ended and economic output will be contracting in both the current July-September quarter and the final quarter of this year.

But David Wyss, an economist with DRI-McGraw Hill, said the country should be able to skate by a period of very sluggish growth without an actual downturn although he cautioned: “It’s time to cross your fingers.”

At the White House, the Bush Administration remained optimistic of reaching its target for overall economic growth of 2.9% this year, as measured by the GNP, although officials said growth would be lower than in 1987 and 1988.

“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,” said presidential spokesman Marlin Fitzwater.

The gross national product, the country’s total output of goods and services, grew at a lackluster annual rate of 1.7% in the just completed April-June quarter, the slowest growth rate in almost three years.

Economists who believe production will keep expanding in the last half of the year base their optimism on the fact that the Federal Reserve Board switched from driving interest rates higher as a way of fighting inflation to easing credit, starting in June, in order to keep the economy expanding.

Lawrence A. Hunter, deputy chief economist of the U.S. Chamber of Commerce, said the debate over whether the economy would actually topple into a recession missed the point that the Fed’s year-long effort to slow economic growth had already produced “unacceptable casualties.”

He said the slower growth, even without a recession, would translate into an extra 500,000 Americans without jobs and $50 billion added to the budget deficit next year.

“The economy is struggling and will continue to struggle as a direct consequence of the Federal Reserve Board’s past tight monetary policy,” Hunter said.

Inflationary Pressures

In another report showing general weakness, the Labor Department said Thursday that productivity of American workers edged up a minuscule 0.2% in the April-June quarter after having fallen by 1.3% in the first three months of the year.

The sluggish growth in productivity, defined as output per hour of work, was accompanied by rising employment costs. Unit labor costs rose at an annual rate of 5.2% in the second quarter after an even faster 6.2% rate of increase in the second quarter.

Economists said this jump in labor costs meant that inflationary pressures would not abate quickly, even though energy and food costs have moderated.

The 0.1% drop in the June leading index reflected widespread weakness, with seven of 11 components declining.

The biggest negative impact came from drop in raw material prices. While this is an indication of lessening inflation pressures, it also can mean less demand, which is viewed as a negative by the forecasting gauge.

Other negative forces in June were a jump in unemployment claims; a fall in building permits; a speedup in business delivery times, also viewed as a sign of falling demand; a decline in the length of the average work week; a drop in orders for consumer goods, and a smaller backlog of unfilled orders for manufactured goods.

Four indicators showed strength in June. The biggest plus factor was a rise in stock prices followed by higher consumer confidence, faster growth of the money supply and an increase in plant and equipment orders.

The various changes left the leading index at 143.5% of its 1982 base of 100.