The government's major gauge of future economic activity fell 0.7 percent in October, the third decline in the past five months and further evidence that the economy's current sluggishness may continue.
The decrease last month in the government's index of leading economic indicators followed a revised increase in September of 0.6 percent and a 0.1 percent increase in August, the Commerce Department reported. Commerce previously had reported a smaller gain in September and a decline in August.
Economists said the statistics indicated continued weakness in the economy, but few predicted a recession next year. However, the major indicators of future orders for goods by businesses turned down again in October following declines or small gains in previous months, signaling a severe slowdown may be ahead.
The last time the index dropped three times in a short period was between December 1981 and March 1982, Commerce said. Some economists said the economy is already in a growth recession, which means that output has not increased enough to prevent unemployment from rising.
Meanwhile, the nation's leading retailers posted modest increases in sales in November and said they expected consumer spending to improve next month. In another report, the Labor Department said that initial claims for state unemployment insurance dropped to 370,000 in the week ended Nov. 17 from 398,000 the week before.
White House spokesman Larry Speakes denied economists' suggestions that the economy had entered a growth recession or was headed toward a recession of any kind.
"We are obviously in a period of economic sluggishness, but no strong trend has developed," Speakes said. "We don't think this is any indication of any recession, recessionary tendencies."
Speakes said the November figures were subject to revision and the zigzags in the numbers "are no clear sign to us of any permanent slowdown."
Commerce Secretary Malcolm Baldrige acknowledged that the economy was in a "sluggish phase" but a recession was out of the question.
"October's weakness in the leading index . . . is disappointing," Baldrige said. "I expect it to improve in November." Baldrige said businesses are now adjusting their inventories following a small decline in real final sales during the third quarter and unintended buildup of their stocks. Consumer spending should pick up later, Baldrige said.
Private economists also expressed concern about the path of the economy, but said the most likely scenario would be a slight rebound in activity next year if interest rates continue to fall. The next likely path would be a recession sometime next year, but few economists expected that outcome.
"The drop in the leading indicators tells you that the fourth quarter will be only marginally better than the third," said Jerry Jasinowski, chief economist for the National Association of Manufacturers. "The main problem is that domestic growth is slowing down in a healthy fashion, but the trade deficit is pulling the economy down too far. Interest rates need to go lower before things get much better."
Many economists placed their belief in a rebound on the expectation that interest rates will continue to decline. Since this summer, the Federal Reserve Board has pursued an easier money policy to help force rates down, and last week reduced the discount rate from 9 percent to 8.5 percent.
The discount rate is the interest rate financial institutions pay when borrowing directly from the Fed. The drop in the discount rate should ensure more reductions in short-term rates, which already have fallen more than 2 percentage points in the past two months. In addition, eight of the nation's 10 largest banks this week reduced their prime lending rates to 11 1/4 percent from 11 3/4 percent.
Edward Friedman, senior economist for Chase Econometrics, said his firm is forecasting a rebound in economic activity next year as a result of lower interest rates, but he added that "the possibility of recession in 1985 is enhanced" by the figures released yesterday.
Seven of the 10 indicators available for October contributed to the decline. The indicators considered key to gauging future business activity by many economists -- contracts and orders for plant and equipment, building permits, and manufacturers' new orders for consumer goods and materials -- were among those that declined.
Building permits contributed to the decline for the last three months and new orders for manufactures and consumer goods declined for two consecutive months. Contracts and orders for plant and equipment, which also declined, made small positive contributions to the index in September and August.
The other indicators that made negative contributions to the index were average weekly initial claims for state unemployment insurance, average workweek, stock prices, and vendor performance -- a measure of the backlog of business deliveries and intensity of business activity. The three indicators contributing increases were change in sensitive materials prices, money supply and net business formation.