April Indicators Point to Slower, Steady Growth : Economy: Commerce Department index offers further evidence that the Fed’s efforts to check inflation are working.

The Commerce Department said Thursday that its chief gauge of future economic growth leveled off in April and that factory orders fell for only the second time since last summer, further indications that recent Federal Reserve Board interest rate increases are cooling the nation’s economy.

Although the department said its index of leading indicators in April held steady with the record levels of March and that factory orders slipped only 0.1%, analysts said the reports indicate that the economy is now growing at a slower, more sustainable pace.

Earlier in the week, the government said that sales of new homes and overall consumer spending also fell in April.

“We’re moving into a period of slow but steady growth, which is far better than having an economy that is growing too fast for its own good,” said Ken Ackbarali, senior economist at First Interstate Bank in Los Angeles. “The table is set for a gradual expansion that could last for a couple of years, instead of running out of gas a few months down the road.”

The index, which measures everything from employment trends to orders for new clothing, is used to forecast the economy’s health six to nine months down the road.

Five of the 11 index components were negative in April, and a sixth was unchanged from March. First-time claims for unemployment benefits rose as stock prices, consumer spending and Americans’ confidence in the economy declined.

Business orders for new plants and equipment also fell. Analysts said the drop signals that manufacturers and other companies have become more cautious about where the economy is headed and are a bit nervous about spending to modernize or expand.

“It’s a fear that could become a self-fulfilling prophecy, because as new orders drop, everybody’s business starts to slow down,” said Sung Won Sohn, chief economist at financial services giant Norwest Corp. in Minneapolis.

Five components of the index--inventories, permits for future construction, prices of raw materials, delivery times and the money supply--showed improvements in April.

The Fed launched the first of four increases in short-term interest rates in early February, after the economy grew at a 7% annual rate during the fourth quarter of 1993. By raising rates, the Fed hoped to cool the economy and keep inflation from skyrocketing.

Thursday’s reports seem to indicate that the central bank’s strategy is working.

Sohn and most other analysts say the economy should grow at a more sustainable 2.5% to 3.5% rate in the second half of the year, as it digests the additional rate increases the Fed instituted in March, April and May.

The Commerce Department report showing a 0.1% drop in orders to U.S. factories in April from March shows that the manufacturing sector is already beginning to slow.

The decline in orders was widespread, affecting nearly every type of manufacturer. Orders for durable goods--appliances and other items expected to last more than three years--fell 0.1%. Orders for non-durable items such as food and textiles also dropped 0.1%.

If a sharp rise in the volatile military-orders category is excluded, April’s decline would have been a much steeper 0.6%. But if a big increase in the equally volatile transportation component is excluded, orders would have eked out a 0.1% gain.

Index of Leading Indicators

Seasonally adjusted index 1987 = 100, April 1994: 101.2 Source: Commerce Department