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Reports Paint a Picture of Slower Growth : Economy: Indicators suggest that expansion isn't keeping pace with third-quarter rate. Inflation appears under control.

November 02, 1995|PATRICK LEE | TIMES STAFF WRITER

A raft of economic indicators released Wednesday show that the national economy slowed in October, with a mixed outlook for manufacturing, inflation under control and consumer spending falling off on the verge of the all-important Christmas spending season.

The indicators suggest that the nation's economy is not keeping pace with the torrid 4.2% growth rate of the third quarter that the Commerce Department reported last week.

"It suggests to me that the strength in the third quarter was really a fluke and that the economy is growing, but is really struggling in that growth," said Paul Kasriel, chief domestic economist at Northern Trust Co. in Chicago.

He forecast national economic growth at a rate of between 1.5% and 1.75% in the fourth quarter; others predict a rate of about 2.5%.

The nation's index of leading economic indicators, which is designed to paint a picture of economic activity six to nine months from now, slipped 0.1% in September, the Commerce Department reported Wednesday. The department also revised its estimate of the index's August increase to 0.1% from 0.2%.

Four of 11 indicators contributed to the index's September decline: falling raw materials prices, indicating less demand; eroding consumer confidence; rising claims for unemployment insurance, and a slowdown in factory orders for consumer goods.

The report was more good news as far as inflation is concerned, and economists said the Federal Reserve Board might be motivated to cut rates at its December meeting.

Worse news came from the National Assn. of Purchasing Management, which reported Wednesday that its index of manufacturing activity fell to 46.8% in October from 48.3% the month before, the third consecutive decrease. Any index below 50% indicates that manufacturing activity is contracting.

"The manufacturing sector contracted for the third month in October, with production and new orders both indicating decreased activity, reversing last month's small increases," Ralph G. Kauffman, chairman of the association's business survey committee, said in a statement.

But the Fed's monthly "beige book" survey of activity in the 12 Federal Reserve districts, also released Wednesday, found that "a pickup in exports and strong domestic demand for certain types of business equipment led to stable or increased manufacturing activity in most districts."

Analysts said the purchasing managers index may have overstated the influence of a machinists strike at Boeing aircraft plants, or understated the contribution of high-tech manufacturers.

In any case, the Fed's report concurred that the nation's economy is slowing, mainly due to a pause in retail sales. "Consumer spending accounts for about two-thirds of national output, so if the consumer is feeling in a blue mood, the economy is not going to grow very rapidly," Northern Trust's Kasriel said.

Sheldon Russell, senior economist at Mellon Bank in Pittsburgh, said consumers may have overborrowed this year. "Bank loans to households, which had been growing like topsy, suddenly decelerated in October. . . . It's likely banks are reacting to credit quality concerns in the consumer area, and they are restricting credit relative to what they were allowing in the summer."

Seven of 11 components of the index of leading economic indicators were positive: new business orders for plant and equipment, stock prices, manufacturers' unfilled orders for durable goods, money supply, average workweek, slower business delivery times that signal rising demand, and building permits.

Construction spending, especially, "is an area that starts to grow rapidly when interest rates go down, which they did," Russell said. "So it's set for fourth-quarter growth as well. The trend is very positive."

While the economic indicators released Wednesday didn't specifically isolate California, which is still struggling to recover from its punishing recession, economists said the state's employment growth is outpacing the rest of the nation.

The Fed's beige book survey showed moderate economic growth in the Pacific region but noted relatively weak conditions in Southern California, Hawaii and Idaho.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Leading Indicators

Seasonally adjusted index of leading indicators; 1987=100

Sept. 1995: 101.1

Source Commerce Department

Purchasing Managers Index

The index tracks overall business activity of more than 300 industrial companies.

Oct. 1995: 46.8%

Source: National Assn. of Purchasing Management

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