Despite Crash, Economy Appears Healthy : Key Indicator Drops 0.2%, Indicating Slowdown but Not Recession

WASHINGTON —  The government’s main indicator of future economic activity weathered October’s stock market crash in better shape than many economists had expected and declined only 0.2% for the month, the Commerce Department reported Tuesday.

Although the figures indicate sluggish future growth, analysts say, the index was bolstered by a strong 0.7% rebound in factory hours worked and smaller gains in the categories of plant and equipment orders, jobless claims, material prices and the nation’s money supply.

Wall Street contributed an unusually heavy negative of 1% to the index of leading economic indicators but economists said the report shows no recession in sight.

Normally, analysts wait for three consecutive monthly declines in the index before raising the warning flags for a recession a few months later. But because the index for September, originally reported at a 0.1% decline, was revised upward to no change, the October index amounted to the first monthly decline since last January.

“The economy will probably slow down a bit in ‘88, but so far it doesn’t look like a recession,” said Michael Penzer, senior economist for Bank of America, headquartered in San Francisco.

Penzer noted that isolated monthly drops in the index have occurred periodically since the post-recession boom year of 1984 without establishing any downward trends and that the index has risen steadily quarter by quarter ever since.

Indeed, he pointed out, the October index reading of 192.4 was a shade above the third-quarter average of 192.3--despite a 0.3-point drop from the level reached in August and September. The readings are calibrated from a base of 100 established in 1967.

David Wyss, of the economic consulting firm Data Resources of Lexington, Mass., noted that the strong upturn in the manufacturing work week merely corrected a “fluke” 0.5% downturn in that category in September caused by the fact that the Census Bureau’s survey week included Labor Day.

That statistical aberration suggests that October may really have been weaker than reported Tuesday, Wyss said, but it also suggests that September may have been stronger.

“The September revision was encouraging because even with this negative in October and a probable negative in November, we still won’t have three declining months in a row,” he said. “And it’s too early to tell what December will bring.”

Allen Sinai, chief economist for the investment firm Shearson Lehman Bros. in New York, also noted the unusual impact of the October market crash and the work week fluke. He cautioned that “it is better to look at September and October as a combination. The mixture does hint at a significant slowdown in the economy in mid-1988, but there’s no suggestion here of a full recession.”

Construction Decline

He added: “The fact that it was mostly the stock market that dragged down the leading economic indicators does, certainly, highlight the impact of the crash. But there is plenty of debate just now over how much it will affect consumer spending and, therefore, the full economy. On its face, the most you can say now is a slowdown, but no recession.”

In a separate report Tuesday, the Commerce Department said cutbacks in building factories and shops led to a 0.5% decline in expenditures nationwide for construction in October, the first monthly decline since March, when that measure fell 3.3%.

The department estimated the value of new construction for the month at an annual rate of $407.9 billion, compared to $409.8 billion in September.