The index of leading indicators, which usually moves in advance of changes in the economy, continued to point in the direction of more recession in March, the Commerce Department reported yesterday.

The index fell one-half percent in March for its 11th consecutive monthly decline.

The figure for February was revised downward from a 0.3 percent to a one-half percent drop, while January's decline was set at 1.2 percent instead of 0.6 percent.

Separately, in a somewhat more positive vein, the department said that new orders for manufactured goods rose 0.2 percent, or $400 million, in March following a 1.2 percent rise in February.

Meanwhile, the nation's money supply rose a seasonally adjusted $1.9 billion in the week ended April 21 to a level of $454.5 billion, the Federal Reserve reported.

The increase left M-1, a measure of the money supply that includes currency in circulation and checking deposits at financial institutions, well above current Fed targets.

"There is no doubt the economy right now is dead in the water," Treasury Secretary Donald T. Regan told reporters at a breakfast meeting, reiterating a comment he first made several weeks ago. "We are on the downslope of the business cycle."

But Regan also said that, "by the logic of postwar business cycles," a recovery should begin before long. He cited the swift pace of inventory liquidation and the 10 percent personal income tax cut that will take place on July 1 as two major factors that will be responsible for launching a recovery.

"You can see how the economy will start to revive," he said. But he also warned that the recovery may be weak if there is no budget compromise between the White House and Congress, leaving huge federal budgets in the prospect.

"With these deficits, the Fed cannot be as accommodative as it normally would be in a recovery mode," he declared. "I don't think the recovery can be nearly as robust as we would like with these deficits."

That is a distinct change from only a few weeks ago, when Regan and administion economists still were predicting that a recovery would begin during the spring. Regan declared at one point that the economy would come "roaring back."

An analyst at the Commerce Department's Bureau of Economic Analysis who helped prepare the report on the leading indicators agreed fully with Regan's new short-term outlook. "There is nothing in here that really indicates that the recession will end in the April-May period," he said.

The three indicators that contributed most to the drop in the composite index were the length of the average work week for production workers in manufacturing, average weekly initial claims for state unemployment insurance, and the change in sensitive crude materials prices. Through the third week in April, crude materials prices still were falling and initial claims for unemployment benefits remained at high levels. Information about the length of the work week will be available next Friday, along with the April unemployment figures.

An increase in building permits issued in March and in a money supply measure adjusted for inflation offset part of the declines in other indicators.

In the release on new orders received by manufacturers, the department said that in the key nondefense capital goods area, orders were up by $1 billion to a level of $21 billion, the first increase in that category since November. However, the hard-hit primary-metals industries got more bad news with a further 8.3 percent, or $713 million, drop. The largest increase came in electrical machinery, which had a 13.9 percent jump in orders.

With the money supply running well above the Fed's targets, and the collapse of the budget negotiations, most financial analysts expect interest rates to remain at high levels. That is the essential reason why they, like Regan, expect a weak recovery unless prospective budget deficits are reduced.