Leading Economic Indicators Lose 1.2% : Economics: Economists say the much-maligned index may well be right for a change.

The government’s key economic weather vane has taken its worst turn in almost three years, the Commerce Department said Friday. The real news: This time, the index of leading economic indicators just might be right.

“Rather than being the leading indicators, they’re often the misleading indicators,” said Michael Penzer, a senior economist at Bank of America in San Francisco. “A lot of economists don’t take them seriously.”

Oil prices are soaring, consumer confidence is wilting and recession fears are loose in the land. By all accounts, August was a crummy month for the economy. And if you have doubts, just check the index: It fell 1.2% in August, its worst performance since November, 1987.

But the index--analysts like to call it “the leaders”--doesn’t get the respect its rather grand name implies. “I look at it. I look at everything,” Penzer said. “But I’ve learned over time that one needs to be skeptical of the leaders.”

The index tries to fathom the course of the economy by honing in on 11 separate measures, including building permits, unemployment insurance claims, the length of the workweek and the size of the money supply. The leading indicators offer a broad-based snapshot of a range of economic activity.

In August, seven of the 11 measures fell, an unusual setback propelled by sharp drops in consumer expectations, stock prices and orders by business for plant and equipment.

While analysts caution against placing too much faith in the economic data for any single month, the recent results highlight the wallop of rising oil prices and uncertainty in the Middle East. The indicators are consistent with poor data on retail sales, industrial production and housing starts that have emerged in recent days.

“I think there’s a legitimate signal coming out of this month’s report, and it says that the economy went into a state of shock immediately after the oil shock,” said Stephen S. Roach, senior economist at the Morgan Stanley investment firm in New York.

David M. Jones, chief economist at Aubrey G. Lanston & Co. in New York, agrees: “I think this time around, the leaders are giving us an accurate forecast.”

One reason the leading index gets little respect is that it contains little news: Its key elements, such as information about the labor market and stock prices, are already available. On Friday, for example, the stock market seemed to ignore the bleak government report; the Dow Jones industrial average gaining 25 points.

Another reason for its mixed reputation is that the leading index has a spotty track record. After its heyday in the 1960s and 1970s--a period of consistent economic growth--the barometer hasn’t done so well, recalled Donald Ratajczak, director of economic forecasting at Georgia State University.

In 1984, for instance, it fell for seven of eight months between March and October, but the economy continued to grow. Similarly, it dropped for four straight months in late 1987 and the economy came roaring back in 1988.

As a result, forecasters have become somewhat aloof from staking their names on any one set of gauges, including the leading indicators. Moreover, the index may be too focused on the economy of yesteryear, when manufacturing played a larger role, without sufficiently emphasizing the growing service sector, analysts said.

“We look at a whole tapestry,” Ratajczak explained. “Are a whole host of statistics showing a consistent picture?”

These days, he continued, the statistics paint a grim portrait indeed: “They all show the economy is going down.”

A particular cause for concern is that some of the weakest indicators in August, such as consumer expectations and the stock market, reflect a gloomy public psychology. Because consumer spending represents two-thirds of all spending in the U.S. economy, such attitudes could lead to a full-blown downturn, economists agree.

“If psychology falls sharply, it will lead to weakness elsewhere,” Jones said, referring to industries that rely on spending by consumers and other business.

Clearly, consumers have been disheartened by the oil shock, which is starting to eat into income through higher prices for gasoline, transportation and other services. Consumer confidence, as measured by the Conference Board in New York, plummeted to a seven-year low in August and has remained there in September, according to new polling results.

But such psychology can reverse quickly. Bank of America’s Penzer, for example, said that if the Mideast crisis is settled, the stock market might rally and consumer attitudes would improve enormously.

“You could have a case two months from now when the leaders go up very strongly,” he said.

As the government report underscores, however, many analysts foresee a gloomy scenario, at least for the near future. Said Roach: “We’d need a miraculous break on oil prices to save us from a recession this time around.”