The index of leading economic indicators jumped 1.3 percent in November, providing another strong sign that the economy is growing again after a four-month pause in its expansion, the Commerce Department reported yesterday.
Nine of the 11 indicators contributed to the increase in the index, which often foreshadows future movements of the economy.
The rise was the largest since last February and reversed a 0.5 percent decline in October. The department initially had reported a 0.7 percent drop for October but revised that report upward, and it also raised to 0.9 percent a gain in September that had been estimated at 0.7 percent.
Anticipating the solid increase in the index, the economic consulting firm of Townsend-Greenspan & Co. told its clients, "Recent economic reports generally reflect a stronger economy, tipping the balance further in favor of the verdict that the third-quarter slowdown was a 'pause' rather than the prelude to a recession.
More building permits and an increase in a measure of the money supply, M2, adjusted for inflation, contributed the most to the rise in the index. An increase in the inflation-adjusted value of contracts and orders for business plants and equipment was the next most important factor. Only the rate of change in business and consumer borrowing and the speed at which sellers were delivering goods were negative factors in November.
The nation's merchandise trade deficit, which is not included in the index of leading indicators, yesterday gave a more negative view of the health of the economy. The excess of imports over exports reached $9.9 billion in November, heading for a record high this year. But Deputy Commerce Secretary Clarence Brown predicted the deficit is likely to fall under the mid-year prediction of $130 billion because the growth in imports has begun to slow.
Last week the Commerce Department estimated that the gross national product is growing at an inflation adjusted annual rate of 2.8 percent this quarter, faster than the 1.6 percent rate in the third quarter. According to the Townsend-Greenspan analysis, overall demand is not rising as strongly this quarter as in the third quarter, but more of it is being satisfied with domestic production rather than imported goods and services, as was the case in the previous three months.
A number of forecasters now expect that real GNP will rise at a 4 percent rate or more in the first half of 1985. However, some still expect another quarter or so of slower growth before such a pace is reached.
Roger Brinner and David Wyss of Data Resources Inc., said, "We expect at least one more quarter of poor GNP growth. The trade balance has not yet fully reacted to the rise in the dollar, and the dollar his risen even farther . . . ," reaching all-time highs against several currencies.
"However, the Federal Reserve has now reduced interest rates far enough to keep final demand strong," the DRI economists continued. "As the spring approaches, we expect the rise in housing and other interest-sensitive sectors to offset the continued deterioration of the U.S. trade blance. The economy will gather steam beginning in the second quarter of next year, and by the second half will once again be moving above its trend rate of growth."
The Commerce Department's chief economist Robert Ortner said the third-quarter GNP would have been almost four percentage points higher if it had not been for the soaring trade deficit, because the nation's increased demand is being met by foreign producers instead of goods made in America.
Without the trade deficit, Ortner said the third quarter GNP would have been a robust 5.5 percent instead of the slim 1.6 percent reported by the government.
In addition to the solid growth in estimated GNP, there was strong upward movement in the November figures for personal income and outlays, employment and new orders for durable goods. Industrial production, which is most directly affected by the flow of imported goods, rose only 0.4 percent, retracing a decline of the same magnitude in October.
The 8 percent increase in building permits that boosted the index of leading indicators was a direct consequence of the decline in interest rates engineered by the Federal Reserve Board and helped along by the pause in economic growth.
The better economic tone was also reflected in a 0.6 percent increase in November for another composite index, that for coincident indicators, according to the Commerce report. In the preceding four months that index, like the economy, had not declined but had shown virtually no growth. A 303,000 increase in the number of employes on nonfarm payrolls was the biggest factor contributing to the rise in the index.