Flat July May Presage Weakness in Economy : Business: The index of leading indicators points to recession even without effects of Mideast tensions.

The government said today that its main forecasting gauge of future economic activity was flat in July, indicating widespread weakness in the U.S. economy even before the Persian Gulf crisis increased the chances of a recession.

The Commerce Department said the lack of any change in the index of leading economic indicators followed revised gains of 0.1% in June and 0.6% in May.

But analysts said they expected a steep drop in August because of the sharp oil price increases and consumer jitters spurred by fears of war in the Middle East after the Aug. 2 Iraqi invasion of Kuwait.

Typically, three consecutive declines in the index are viewed as a fairly reliable, although not infallible, signal that the economy is headed for a recession.

In the wake of Iraq’s invasion, many economists believe a recession is looming, as an already sluggish U.S. economy falls victim to rising inflation and consumer worries about a possible war.

While the leading index normally forecasts economic activity six to nine months in advance, some analysts believe the next recession may start sooner, with the most pessimistic believing the country may already be in a downturn.

Already, the stock market, one of the components that make up the index, has staged a sharp retreat, and consumer confidence is on the skids.

“Initial reports from the University of Michigan (which measures consumer sentiment for the Commerce Department) indicate that the consumer’s first reaction to the Iraqi invasion was near-panic,” said economist Mark M. Zandi of Regional Financial Associates in West Chester, Pa.

The sentiment index fell 15 points, more than after the 1987 stock market crash, “to a level consistent with previous recessions,” he said. “Although sentiment has likely improved in recent days . . . the risks of a consumer retrenchment are rising.”

Since consumer spending represents two-thirds of the nation’s economic activity, many analysts fear the Persian Gulf crisis could cause further retrenchment leading to a recession.

However, after falling in May and June, the consumer index rose slightly in July. Other positive contributors to the index were an increase in orders for new plant and equipment and an increase in the price of raw materials.

Negative contributors were faster business delivery times, a decline in the money supply, a drop in manufacturers’ unfilled orders, a shorter average workweek, a drop in building permits, an increase in weekly unemployment claims and a decline in the stock market.

One of the components, orders for consumer goods, was unchanged.