November 2, 1995 in Nation/World

Forecasting Gauge Signals Slower Economic Growth Analysts Expect Expansion To Continue Despite Fresh Signs Of Weakness

Associated Press

The government’s economic forecasting gauge fell in September for the second time in three months and has risen only twice all year.

But despite that and other signs of weakness - surveys by the Federal Reserve and a business group found declining activity in October - analysts said the economy still is growing at a healthy pace with little inflation.

The Commerce Department said Wednesday that its Index of Leading Economic Indicators, soon to be turned over to a private group, slipped 0.1 percent in September. And the department revised August’s figure downward, too, saying the index had risen 0.1 percent rather than the 0.2 percent previously reported.

Falling prices of raw materials in September exerted their biggest drag on the index in 15 years - welcome inflation news though seen as negative in forecasting any speedup in business activity. Higher prices would suggest increasing demand.

Separately, the Federal Reserve, in a survey completed last week by its 12 regional banks, said it detected slowing business activity in the fall, including indications of “a pause in retail sales” in some areas.

But analysts showed little concern.

“It’s really very much on trend and that’s where you would want to see it,” said economist David Munro of High Frequency Economics, a New York City forecasting firm. “The inflation figures have been especially benign.”

In another report Wednesday, the Commerce Department said construction spending jumped 1.2 percent to a record high in September, marking the fourth consecutive advance as both residential and government outlays increased.

Bond prices rose sharply after the National Association of Purchasing Management said manufacturing activity slowed in October for the third straight month. A slowdown increases chances for lower interest rates, which move in the opposite direction of bond prices.

Stocks posted modest gains in a sluggish session. The Dow Jones industrial average rose 11.20 points.

Michael Evans, who heads a forecasting service in Boca Raton, Fla., said the economy may be weaker than many believe but the Federal Reserve is not likely to cut interest rates.

“I question whether they will act this month and there’s only a 25 percent chance of a cut in December,” he said.

The Federal Reserve meets Nov. 15 and holds its last meeting of the year Dec. 19. After doubling the rate banks charge each other for overnight loans, the Fed lowered the rate in July for the first time in nearly three years and has remained on hold since.

The government reported last week that gross domestic product, the broadest measure of economic activity, advanced at a robust 4.2 percent annual rate in the third quarter - or more than three times the increase of the previous three months.

But many analysts expect the pace to be around 2.5 percent in the current quarter as consumers, loaded with debt, slow their spending.

The encouraging news in the Index of Leading Economic Indicators was the continued slide of commodity prices. They have had a negative impact on the barometer 12 times in the last 13 months.

Three other components besides raw materials contributed to the index’s September decline: slipping consumer confidence, rising initial weekly claims for state unemployment insurance and slowing factory orders for consumer goods.

The seven components that made positive contributions to the index were new business orders for plant and equipment, stock prices, manufacturers’ unfilled orders for durable goods, money supply, average work week, slower business delivery times that signal rising demand, and building permits.

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