Drop in Key Index Points to Another Interest Rate Cut

The U.S. index of leading economic indicators fell in December for a third straight month, suggesting that the economy will slow further and reinforcing expectations for another cut in interest rates by the Federal Reserve when it meets next week.

The Conference Board’s index, a gauge of economic activity over the next three to six months, fell 0.6% last month after declining 0.4% in each of the prior two months. December’s drop reflected a rise in layoffs and declines in consumer confidence and the number of factory hours worked.

The report suggests “more moderation in economic activity in the first half of 2001,” said Ken Goldstein, a Conference Board economist. Still, he sees “no recession looming.”

December’s decline in the leading indicators index was the largest since January 1996, when it fell 0.7%. The Conference Board uses previously reported economic statistics to compile the index.

December’s drop was exacerbated by a technical adjustment made by the Conference Board, which put the leading and lagging indexes in sync with the coincident index, Conference Board economist Ken Goldstein said.

“It is important to emphasize that because of the new scaling procedures, these declines are larger than they would have been in the past,” Goldstein said.

Without that adjustment, December’s leading indicators would have fallen by 0.3%.

“We are seeing the clear emergence of a slowdown, which makes the need for an additional interest rate cut at next week’s Federal Reserve meeting all the more important,” said Jerry Jasinowski, National Assn. of Manufacturers president.

The Fed meets Jan. 30 and 31 to decide whether to cut interest rates again. It slashed rates earlier this month to stave off a possible recession, cutting 50 basis points from both the federal funds overnight lending rate and the discount rate charged on Fed loans to commercial banks.

Though the Conference Board’s index is designed to gauge the economy’s performance in coming months, its reliability is questionable. The string of three straight monthly decreases was the first since January-May 1995. But the economy grew 4% in the 12-month period that followed that stretch of decreases.

Among the 10 components of the New York group’s index, seven had a negative effect in December and three made positive contributions. Other weak components were falling stock prices, new orders for non-defense capital goods and building permits and a drop in the yield on the 10-year Treasury note relative to the Fed’s overnight bank lending rate.

A rise in the money supply, improved vendor performance and new orders for consumer goods were positive contributors.