Hints of cooler economy point to more trouble in scaling down deficit

The drop in the index of leading indicators for the second month in a row does not portend a recession just around the corner. What it does mean is that the job of maneuvering the economy through 1985, when there needs to be more progress on the federal deficit, is going to be exceedingly challenging.

The index of future economic activity dropped 0.8 percent in July. The June drop of 1.3 percent was a revised figure from the original minus-0.9 percent. The May figure, although positive, was also revised downward. Several of the elements in the index have to do with interest rates and their indirect effects elsewhere in the economy. Normally, as an expansion matures interest rates rise and are one reason for that cycle's coming to an end. If action is taken on the deficit in time, or if investor perceptions on future inflation become more positive, interest rates could decline. Thus, one thing making the leading indicators negative could straighten itself out in time.

One very encouraging piece of economic news during the week was the report on gains in productivity. During the second quarter, nonfarm productivity rose 4.7 percent - a very high gain by historic standards, particularly in view of the fact that the recovery is as far along as it is.

Other statistics, however, tend to show the economy going close to sideways. New-home sales, at a 630,000 annual rate, stayed at their June level. But they are down from their February peak by 11 percent. Factory orders recovered 1 percent from their June level, but ran 2 percent below their March peak. New claims for unemployment insurance rose 24,000 during the week, to 375,000. This weekly figure is volatile, but as it approaches the 400,000 level it needs to be watched.

The worst piece of economic news during the week was the July trade deficit - a record $14.1 billion for the month. Some of this deficit may represent early ordering by importers taking advantage of the United States dollar's current strength. Whatever the cause, the general estimate that this year's trade imbalance will be in the $110 billion-to $130 billion range is bad news.

Labor Day weekend has normally been a time of reassessment. Summer is over, school starts, and the economists crank up their outlooks for the next year. And every four years it's also the start of a presidential election campaign. Where is this economy - really? Geraldine Ferraro said last week that if President Reagan asks if anyone is better off than four years ago, he'd better ask only his friends. That kind of political hyperbole is just that. Record numbers of Americans are at work, and an inflation that was becoming accepted as endemic to the system in 1980 has been broken.

But per capita income gains during the past four years have not been what they were in the '70s. By recent standards, there is still a high rate of unemployment. The need to finance the federal deficit, for which no end seems in sight, keeps interest rates too high. And those rates in turn bring in foreign investment dollars, delay the needed recovery in other countries, add to the foreign debt servicing costs of other nations, and hurt US exports by keeping the US dollar overvalued in foreign-exchange markets.

It is good news that the economy is not overheating. But if growth slows too quickly, there will be little opportunity to do much about the deficit next year. And that would be bad news.

The week's statistics seem to give some fodder to both sides in this election campaign. What is more important is that the overall tone of the economy for most of the summer has been one of a gradually slowing recovery. If that continues, the challenge of dealing in a significant way with the deficit in a new administration will be great indeed.

About these ads
Sponsored Content by LockerDome

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...

Save for later

Save
Cancel

Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items

OK

Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items

OK

Failed to save

You have already saved this item.

View Saved Items

OK