An Ominous Index?

The worrisome "pause" in the nation's economic recovery (TIME, Oct. 4) was further documented last week when the Commerce Department announced its Index of Leading Economic Indicators for August. The index dropped for the first time in 18 months, declining 1.5% from July's figure. On Wall Street investors responded to the news by sending the Dow Jones industrial average into an 18.20-point plunge, its biggest one-day slide in more than four months.

Downward Revisions. The number that caused all the stir is a complex mathematical composite of twelve* important economic indicators. Of these three were largely responsible for the drop: the layoff rate in the manufacturing sector (it rose), the length of the average work week, and the dollar value; of contracts and orders for new plan and equipment (both declined). But Julius Shiskin, commissioner of labor statistics, believes there are technical aberrations in the layoff and work-week statistics and that after recalculation they will be corrected for the better. Other factors taking the sting out of the August index drop: the decline in new orders followed a strong surge in July economists expect capital spending to pick up again in September; the number of building permits issued rose in August, a further sign that the crucial construction business is slowly recovering.

Still, the index seems to show that while the recovery has not been reversed, it surely has slowed. The G.N.P grew by 9.2% in the first quarter, by only 4.5% in the second, and was general expected to sustain its second-quarter growth in the third. Now many economists will be revising their third-quarter predictions downward.

The Commerce Department had some other doleful news last week. The U.S. August trade deficit was the third largest monthly amount ever recorded imports exceeded exports by $757.7 million. Even so, it was a better showing than in July, when the deficit was $69.4 million greater. In fact, the nation's balance of trade has been unfavorable ever month this year except May, and the total 1976 trade deficit could reach $1 billion--at least $1 billion more than Government economists had foretold.

The fault did not rest with oil imports alone; they declined $256.2 million (after a $527.3 million rise in July) Instead the deficit in part reflects the fact that the U.S. economic recovery is further along than those of its major industrialized trading partners. That means that U.S. demand for goods fron abroad has been rising faster than foreign purchases of American exports.

* Because the future for inventory changes was not available in time, only eleven categories were used for the August index.

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