May 4, 1995 in Nation/World

Indicators Point To Slowdown Some Economists Say Drop May Be Prelude To Recession

Associated Press
 
Tags:economy

The government’s main economic forecasting index took its biggest tumble in two years in March, prompting some talk of recession as financial markets rallied in hope inflation will remain at bay.

The Commerce Department said Wednesday that its Index of Leading Economic Indicators dipped 0.5 percent in March and recorded its first back-to-back declines in nearly three years. The gauge was flat in January and has not moved upward since the end of last year.

The Clinton administration and many private analysts said the decline and a new report that factory orders fell for the second month in a row are signs of a welcome cooling-off that will help sustain the economic recovery into a fifth year.

“This is all pretty gentle settling down. It’s pointing away from a recession,” said David Munro of High Frequency Economics, a forecasting firm in New York City. “It’s something in between a boom and a bust, and that’s a soft landing.”

“What we can say from this number is it does show a moderation of growth,” said Laura Tyson, director of President Clinton’s National Economic Council. “Everything so far suggests we are on track for the annual forecast we gave.”

But some analysts said the risk of a recession could increase, particularly since the full impact of interest rate increases by the Federal Reserve are yet to be felt.

“I’m not surprised you’re seeing talk of a recession,” said Daniel Seto of Nikko Securities Co. International in New York. “But we think it’s premature. We’re coming off extremely strong growth.”

The Fed doubled short-term interest rates, from 3 percent to 6 percent, in a 12-month period that ended Feb. 1.

While business spending on plant and equipment has remained strong, analysts said higher interest rates are contributing to a marked slowing in consumer spending. That has been particularly true for home buying and for bigticket items such as cars that normally are purchased on credit.

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 Commerce Department said components of the gauge aimed at measuring consumer demand made the biggest negative contributions as only three of 11 components had an upward impact.

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

Stock and bond markets welcomed the signs of slower growth. The Dow Jones industrial average soared 44.27 points to 4,373.15, another record.

The March decline in the Index of Leading Economic Indicators - larger than analysts predicted - is the biggest since March 1993, when the gauge fell 0.8 percent. The last consecutive declines were in August and September of 1992.

Six of the gauge’s components contributed to the slide, led by a pickup in business delivery times. An increase in the pace of deliveries is a sign of declining demand.

Other factors contributing to the index’s drop were falling consumer expectations, a smaller rise in raw material prices, a shorter average workweek, fewer building permits, and declining factory orders for consumer goods.

Advancing factors were stock prices, new orders for plant and equipment and more unfilled orders for durable goods.

Money supply and the average weekly initial claims for state unemployment insurance were unchanged.

© Copyright 1995 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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