WASHINGTON — The government's main barometer of future economic activity rose a strong 0.8% in June for the fifth consecutive monthly increase, the Commerce Department reported Thursday.
The steady upward trend in the index of leading indicators seems a sure sign that no recession is likely soon, but economists cautioned that the unexpectedly strong June increase almost certainly overstates the real strength of the economy.
Of the nine components of the index reflected in the June report, only two showed any sizable gain: a 0.45% increase in the prices of commodities needed in manufacturing and a 0.34% rise reflecting the continuing stock market boom. Without those price-sensitive indicators, which could even signal an ominous inflationary rise, the index would have been virtually unchanged.
"The 0.8% number is misleading because all the growth was in the stock market and materials prices," said Douglas Handler, an economic forecasting specialist at Wharton Econometrics of Bala Cynwyd, Pa. "These increases are not indicative of real market forces. And, if you take those out and average the last three months, you get monthly increases of only about 0.3%--and that adds up to weak growth for the rest of the year."
At the end of June, the index, calibrated on a level of 100 in 1967, had reached 190.4.
January, which posted a 185.5 level, was the last month during which the index declined. In May, the increase was 0.5%. (The index is made up of 11 components, but figures for two of them--changes in inventories and changes in credit--were not available for the June report, indicating that the index will be revised next month.)
Strong Expansion So Far
"The main thing here is the trend: The direction is up, and since the indicators point ahead at least six months, there's no need to worry about a recession for now," said David Wyss of Data Resources Inc., a Lexington, Mass., forecasting firm. "But it's up at an annual rate of only 4% over the six months, and that suggests growth is not speeding, but there are worse things around than slow growth."
Nevertheless, with annual growth rates in the gross national product of 4.4% in the January-March quarter and 2.6% in the second quarter, the economy has pulled off a 3.5% annual expansion rate so far this year, the strongest in three years, Wyss noted.
If taken at face value, the 0.8% increase and the fifth straight month of increases in the index are "consistent with stronger economic growth in the third quarter than what we saw in the second," noted Irwin Kellner, chief economist at Manufacturers Hanover Trust of New York.
Kellner also noted that a small 0.09% increase in the index for new orders for consumer goods "is consistent with the view that the lower value of the dollar is continuing to have a positive impact on the competitiveness of domestic goods producers."
But Kellner noted that the small increase for new orders was offset by negative factors involving employment insurance claims, plant and equipment orders, delivery of products by vendors and the money supply--leaving the stock market and material price increases as the main sources of probable future growth in the barometer.
This, Kellner warned, could be a harbinger of inflation and an eventual economic downturn, perhaps as early as next year. "No matter how you slice it, inflation is back and it's not getting any better," Kellner said.
Inflation, measured by the consumer price index, has jumped at an annual rate of 5.4% this year. And, if the surge in fuel and food prices last winter and spring does not level off, as many economists expect they will, the year's inflation record will be the worst since 1981.
"While the indicators are telling us there is no recession in sight, . . . the past record shows that when you get a return of inflation, then higher interest rates follow, then the stock market is affected and the economy goes into the tank," Kellner said. "As it is, the bull market is living on borrowed time."
Kellner said the economy could begin to tip into decline as early as spring, 1988--but, thanks to the continued surge in indicators typified by Thursday's report, the short-term outlook remains bright. "Recession is nearer, but for the time being you can expect things to get better, not worse," he said.