Forecasting Gauge Takes Biggest Fall in Two Years : Economy: Commerce Department says leading indicators fell 0.5% in March, the second monthly decline in a row.

The government’s chief gauge of future economic activity showed its biggest tumble in two years in March, as President Clinton’s top economic aide said Wednesday that the economy’s slowdown is likely to last through the election year of 1996--a trend that is unlikely to make most voters feel kindly toward candidate Clinton.

The 0.5% decline in the index of leading economic indicators, following a 0.2% drop in February, marked the first time in nearly three years that the gauge has dropped in two consecutive months.

The report portrayed slower economic growth with little danger of inflation. Financial markets welcomed that news; the Dow Jones industrial average rose 44.27 points to a record 4,373.15.

Even as those numbers were released, Laura D’Andrea Tyson, chairwoman of the National Economic Council, said in a luncheon interview with Times reporters and editors that the message from the economy is good. There is no sign of overheating that would lead to increased inflation or a plunge into recession, she said.

But the “soft landing” that the Administration foresees may not help Clinton’s reelection chances much, she said, because most Americans are seeing no significant increases in their family incomes.

“We’ve just had, arguably, by most economic indicators, the best macro (overall) performance of the U.S. economy in a generation,” Tyson said. But “the majority of Americans are not seeing a strong macro economy translate into increasing incomes,” she said. “And we’ve seen a lot of Americans actually see declines.”

As a result, the traditional political logic--that a growing economy helps an incumbent President win reelection--may no longer hold, she said.

“The political business cycle literature assumed a world in which a great macro economy translated into a sense of most Americans that they were doing well. That has not been true in 1994 and it wasn’t true in 1993 . . . because of the underlying fact that the distribution of income is, in fact, becoming much more unequal,” she said.

In another report suggesting a softer economy, orders to U.S. factories fell 0.1% in March, the second straight monthly decline, the Commerce Department said. Analysts had expected orders to rebound in March from a drop of 0.3% in February.

The statistics released Wednesday are part of a growing body of evidence that consumers have tempered their ebullient buying behavior of 1994 in the wake of seven hikes in interest rates over the last 15 months. Most components of the index of leading economic indicators slipped, including such gauges as consumer sentiment and factory orders.

Only three of the index’s 11 components rose, including new orders for plant and equipment by business, which has been one of the bulwarks of the recovery this year.

Optimists, including officials of the Administration, have been pleased by the softer tone of recent economic statistics, citing them as evidence that the national recovery can sustain itself without overheating--a development that would prompt further interest rate increases by the Federal Reserve Board and risk a full-blown recession.

“It’s another sign that a soft landing is in progress right now,” said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis.

Some forecasters, however, were given pause by the latest signs. Higher interest rates have cut into key sectors of the economy that rely on credit purchases, such as homes, autos and other big-ticket items.

“On balance, the numbers of the past few months show that the economy is in a growth slowdown,” said Gary Schlossberg, senior economist at Wells Fargo Bank in San Francisco, adding: “Hopefully, they aren’t signaling a recession.”

The index of leading economic indicators is designed to signal the direction of activity six to nine months down the road. Three straight moves by the index in the same direction are considered a good gauge of where the economy is headed.

The economy expanded by more than 4% in 1994, its best showing in a decade. Now, many analysts foresee a slowing down toward a pace of 2% to 2.5%.

The March decline in the indicators--larger than analysts had predicted--is the biggest since March, 1993, when the gauge fell 0.8%. The last consecutive declines were in August and September of 1992.

Tyson is among those who thinks the slower growth is good news because it avoids the danger of an overheated economy with high inflation that would prompt the Federal Reserve to boost interest rates. “I don’t see the overheating scenario,” she said. “It’s not in the numbers.”

Moreover, she said, over the long run a slow-growth, low-inflation economy will raise most incomes more than a boom-and-bust cycle.

“It would be a terrible loss if the expansion were to end before you had Americans really feel the benefits of a strong economy,” she said. “That’s why we’ve emphasized all along the sustainability issue. You just have a sustained expansion that requires a sound set of monetary and fiscal policies at the foundation. We have a low-inflation environment right now, which is a very good environment in which to try to sustain an economic expansion.”

While Clinton’s policies are helping increase incomes across the board, Tyson said, most of their effect will only be felt over the long run--not in time for next year’s election campaign.

Political scientists say that, as a rule of thumb, growth in per capita income of 3% per year should guarantee the reelection of an incumbent president.

There is little the Administration can do to boost incomes--or improve the economy further--in the 18 months remaining before election day, Tyson said. The tax cut Clinton has proposed “is phased in very gradually” and would not “be significant enough to make a difference in 1996,” she said.

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Leading Indicators

Seasonally adjusted index of leading indicators; 1987=100

March 1995: 101.8

Source Commerce Department

Factory Orders

Total new orders, in billions of dollars, seasonally adjusted:

March 1995: $300.60

Source Commerce Department