Index of Leading Indicators Rises as Trade Deficit Drops

WASHINGTON â€”  The government’s main economic barometer rose a moderate 0.4% in July, while the trade deficit fell to $10.5 billion, the lowest since January, the Commerce Department reported Friday.

In addition, factory orders declined 1.3% during the month, and many economists who put the three figures together concluded that the nation’s economy will continue to simmer along with little chance of dramatic growth in the near future.

‘Soft’ Gauges of Economy

Several noted that the rise in the index of leading economic indicators was caused mostly by its financial components, which economists view as “softer� gauges of the economy than the manufacturing components.

Some economists hailed the drop in the trade deficit, but others said they doubted that it signaled a trend. Moreover, some said that the good news was tempered by the fact that the government revised the June rise in the index of leading indicators to 0.4%, down from 1%.

“It’s an OK report,� Georgia State University economist Donald Ratajczak said of the day’s economic news, “but no one is going to claim strong things about it, except maybe the Administration.�

Indeed, White House spokesman Larry Speakes, briefing reporters in Santa Barbara, Calif., asserted that the economy was making a “solid advance,� including the 1.4% rise in new home sales announced Thursday.

But the Commerce Department’s chief economist, Robert Ortner, called the improvement in the leading indicators and the trade deficit “moderate,� adding: “It’s not as good as it appears.�

Ortner noted that the index rose chiefly because of improvements in the indicators for money supply, stock prices and weekly claims for state unemployment insurance. He said that he would be “much happier� to see improvements in areas such as building permits and plant contracts and orders, both of which fell in July.

Ratajczak agreed, saying that improvements in those areas “would mean we’re building up orders and could hire people.�

No Strong Signals

July’s 0.4% increase in the index of leading indicators, matching the revised June figure, sends no strong signal of the index’s future direction, several economists said.

One of the more optimistic readings of the figures was made by Michael K. Evans, president of Evans Economics, a Washington consulting firm. He called the improvement in the trade deficit “a big surprise, huge numbers,� and asserted that the decline in imports represents improvement carved out by the “cutting edge of the weaker dollar.�

But other economists, pointing out that a $2.9-billion drop in imports was caused largely by a 19.3% drop in oil shipments compared to June, said that the trade deficit improvement was a fluke.

Similarly, many said that a slump in automobile shipments from Japan would not last. In July, U.S. imports from Japan totaled $5.9 billion and exports amounted to $1.9 billion. The resulting $4-billion deficit was $600 million less than in June. The United States posted a $1.9-billion deficit with Europe and a $1.3-billion deficit with Canada.

Overall, the July trade deficit of $10.5 billion is the smallest since January’s $10.3 billion, and it occurred after three months of increases. But it resulted from a drop in imports, not from increased exports: Exports remained at $17.4 billion, the same as in May and June and almost $2 billion less than the July, 1984, figure of $19.2 billion.

In the report on July factory orders, the government said that new orders totaled $195.6 billion, $2.6 billion less than in June after seasonal adjustment. The industrial economy has been nearly flat this year.

In another development, the Reagan Administration sliced $2 billion from its April forecast for the fiscal 1985 deficit, leaving it at $211.3 billion, still a record.

An Office of Management and Budget report called “Mid-Session Review of the 1986 Budget� contains estimates for up to the year 1990, when the Administration predicts a deficit of $17.7 billion.

Deficit Forecasts

For 1986, it forecasts a deficit of $177.8 billion; for 1987, $139.3 billion; for 1988, $99.8 billion, and for 1989, $53.6 billion.

But the report, which tied its lowered estimates largely to less defense spending and lower interest rates, contained a political caveat.

It said: “These estimates do show that meaningful deficit reduction is possible, but, unless the Congress reduces non-defense spending well below resolution levels, actual deficits are most likely to be substantially higher than these estimates.�