Economy continues to slow

Amy Baldwin

Tuesday, Oct. 3, 2000 | 10:46 a.m.

NEW YORK -- For the fourth consecutive month, a key measure of U.S. economic activity fell slightly, the latest sign that economic growth is continuing to slow, an industry group said today.

The Index of Leading Economic Indicators declined by 0.1 percent in August to 105.7, according to the New York-based Conference Board. The index's decline met Wall Street analysts' predictions.

The index, which attempts to forecast economic trends for the next three to six months, stood at 100 in 1996, its base year. Except for a 0.1 percent increase in March, the index has been flat or declining throughout this year.

"The flat pace in the leading indicators points to continued moderations in U.S. economic activity," said Conference Board economist Ken Goldstein. "This is reflected in indicators for manufacturing, housing, consumer, labor and financial markets.

"The economy is starting to reflect the impact of growth restraints. Interest rate and growth restraints will determine how much slower the economy will be in the last few months of the year."

In a separate report, the Commerce Department said new-homes sales fell 3 percent in August, despite cheaper mortgage rates, though they still remain strong.

Six of the index's 10 indicators -- including average workweek production, vendor performance, index rate spread and consumer expectations -- fell in August.

Economist Paul Christopher said the slowdown is natural in a rapidly growing economy.

"That is a sign that the economy is not really pausing for a breath," said Christopher of A.G. Edwards & Sons Inc. in St. Louis. "It is going to be a good healthy slowdown."

In the past, three declines in a row in the leading indicators index has signaled the U.S. economy could be headed into a recession in the next three to six months. However, Christopher said, that no longer holds true.

"Rules like that are probably better off just being historical artifacts," he said. "It is really difficult to predict a recession."

The economy is still showing strength. The board's Index of Coincident Indicators, which gauges current economic activity, rose 0.2 percent in August to 115.9 percent after remaining flat in July at a revised 115.7.

The Index of Lagging Indicators, which reflects changes that have already occurred, increased by 0.3 percent to 105.6 after remaining flat in July at a revised 105.3.

The three indexes are used together as a barometer of overall economic trends.

Separately, analysts say the Federal Reserve, after pushing up interest rates for more than a year to brake the speeding economy, will stay on the sidelines for the rest of this year. They say the higher rates have slowed growth to a more sustainable pace.

Many private economists expect the Fed will repeat its June and August decisions not to boost interest rates, given mounting evidence that inflation -- aside from a burst in energy costs -- isn't worrisome.

"The economy is like a car that the Fed has been trying to slow. The Fed has its foot on the brake and we don't expect them to have to step on the brake any harder," said Gary Thayer, chief economist at the stock brokerage house A.G. Edwards & Sons Inc. in St. Louis.

The last rate movement was an aggressive half-point increase on May 16.

The Federal Open Market Committee, composed of Fed board members and regional bank presidents, was meeting behind closed doors today to discuss interest rate policy. An afternoon announcement was expected.

"The likelihood is that the Fed is going to take a break for the fall and the early winter," given the evidence of a slowdown, said Tim O'Neill, chief economist of Harris Bank in Chicago.

Analysts said many factors figure into their expectation the central bank will leave rates unchanged. They include rising oil prices, and stock market volatility, which can have the effect of discouraging consumer spending, thus dampening economic growth.

Those things "have punched the consumer in the chin," said David Jones, chief economist at Aubrey G. Lanston & Co. in New York.

Another factor: the belief among economists that the Fed would prefer to maintain a low profile at its last meeting before the presidential election on Nov. 7.

The Fed, starting in June 1999, has raised rates six times, pushing up its federal funds rate, the interest that banks charge each other, by 1.75 percentage points to 6.5 percent.

Those increases have triggered matching increases in banks' prime lending rate, the benchmark for millions of business and consumer loans, which now stands at 9.5 percent, a nine-year high.

But after a bold half-point increase in the federal funds rate on May 16, double the normal quarter-point move the Fed has made under Chairman Alan Greenspan, the central bank left rates unchanged at its June 28 and Aug. 22 meetings.

Some economists believe that if the Fed decides for a third time to leave rates alone it will be a signal that the central bank is declaring a cease-fire in its higher-rate campaign.

Some economists said they were expecting the Fed to telegraph its decision by switching the portion of its statement intended to foreshadow future actions to neutral. That would indicate the central bank views the risks of higher inflation and weaker growth as equally balanced going forward.

The Fed, however, has been indicating that it perceives inflation as a bigger risk to the economy.

Other analysts doubted the central bank would make that change. Such an announcement could spark an unwanted rally on Wall Street as investors got a clear signal that they could stop worrying about the risk of further Fed rate increases. The weakness in stock prices has been seen as one of the factors dampening consumer spending, something that has to occur for the economy to shift to slower growth.

Even if the Fed does not change its "policy bias," many analysts believe the central bank will remain on hold for the rest of this year. The next policy move, they said, could well be a reduction in rates, beginning perhaps as early as next spring.