Signs Point Toward Slowdown Leading Indicators Decline For First Time In 15 Months

Adding to evidence the economy’s growth cooled as the second quarter began, a key indicator of future economic activity declined in April for the first time in 15 months.

The Conference Board said Tuesday that the Index of Leading Economic Indicators slipped 0.1 percent in April to 103.5, falling short of economists’ expectations for a 0.2 percent gain.

The April drop followed an increase in March of 0.3 percent, revised from an originally reported increase of 0.1 percent. The February index was up 0.5 percent. The index is a gauge of future economic activity, but analysts look for at least three straight months of change to confirm the economy has shifted gears.

The first drop in the index since January 1996 came as economists scrutinize the economy for signs of weakness ahead of the Federal Reserve’s interest-rate policy meeting on July 2 and 3. Slower growth would calm inflation fears and reduce the likelihood of another interest rate increase by the Fed.

Investors responded to Tuesday’s report by pushing down bond-market interest rates and staging a rebound in the stock market. The Dow Jones industrial average gained almost 23 points to return above 7,300, while yields on 30-year Treasury bonds fell to 6.86 percent from 6.90 percent late Monday.

But there are questions on whether the apparent April slowdown marks only a short pause in a long-running economic expansion.

Anthony Chan, vice president and chief economist at Banc One Investment Advisors in Columbus, Ohio, said April’s dip was largely tied to special factors such as labor unrest and a flood in the Midwest. He said the April leading indicators may, therefore, overstate the slow-down in the economy.

“All of that certainly makes the leading indicators appear more like misleading indicators,” Chan said.

Weekly unemployment claims, for example, turned sharply lower in May, and consumer confidence rose to its highest level during the current seven-year expansion.

On Monday, the National Association of Purchasing Management said its index of business activity rose substantially in May. But also released Monday were a moderate increase in consumer income and spending, and a sharp drop in April construction spending.

On Tuesday, TeleCheck Services Inc., a leading check-approval company, said retail sales rose a modest 2.3 percent in May.

Taken together, this week’s data left open the question whether the economy is steamy enough to prompt the Fed to raise interest rates at its next Open Market policy committee meeting, Chan said.

Robert Parry, the president of the Federal Reserve Bank of San Francisco and one of the policy-makers who votes on setting interest rates, said Tuesday in Alaska that Fed policy should be focused on keeping the economy growing. He said the central bank believes that can best be achieved by keeping inflation low.

“The key is clearly whether or not this economy slows down to a sustainable rate of growth,” Parry said in response to questions after a breakfast speech in Anchorage. “I would suggest there are reasons to be encouraged.”

He said there are signs that the second-quarter economic growth rate will be significantly slower than the 5.8 percent rise reported in the first three months of this year, the strongest performance in a decade.

The Fed raised short-term rates by one-quarter of a percentage point on March 25, the first rise in 28 months, in a pre-emptive strike against inflation. But it failed to follow through with a second increase at its May meeting.

David Jones, chief economist at Aubrey G. Lanston & Co., predicted the central bank will keep rates unchanged in July, which should promote growth in the coming months.

“What we have fundamentally in the economy is extremely high consumer and business confidence, stable financial conditions, low interest rates, a high stock market, and a fairly passive Fed that seems to be happy to let growth materialize in the economy, and put more emphasis on growth than on fighting inflation.”

The leading index is designed to forecast economic activity six to nine months in advance. Thus, its February gain suggests the economy will continue to expand at least through the summer.

Over the six months ending in April 1997, the composite index increased 1 percent, and eight of the 10 components of the index advanced.

The Conference Board said six of these 10 indicators weakened in April, with the most significant coming in higher average weekly claims for state unemployment benefits, and in lower stock prices. The most significant positive contributor in April was a rise in money supply.

The index operates from a base of 100, set in 1987.