Economic Index Rises Healthy 0.7% : Indicators Rebound in Feb. After Sharp Drop a Month Earlier

The government’s main gauge of future economic activity rose a healthy 0.7% in February, the Commerce Department reported today.

The department’s Index of Leading Indicators posted its best gain since a three-year high of 2.4% in December.

That gain was followed, however, by a 0.5% drop in January. The volatility in both December and January was blamed on the new tax law, which caused a spurt of buying activity late last year as businesses and consumers rushed to take advantage of expiring tax breaks.

Analysts said the February increase, which was in line with expectations, was more representative of the underlying economy.

Economic Growth Sags

Economic growth, as measured by the gross national product, sagged in the final three months of 1986 to an annual rate of 1.1%.

The Reagan Administration and many private economists believe growth will revive this year, although there is debate over just how substantial the upturn will be.

The 0.7% increase in the index for February was accompanied by a substantial upward revision in the January performance, which originally had been reported as a 1% decline.

The biggest source of strength for February came from the huge rise in stock market prices. However, the market, after setting a string of new highs earlier this month, suffered a big decline on Monday, with the Dow Jones industrial average falling by 57.39 points.

More Goods Ordered

Also contributing to the strength in February was a big rise in manufacturers’ orders for consumer goods, a rise in the average workweek and more applications for building permits.

The biggest negative factor holding the index back was a change in raw materials prices, followed by a decline in growth in the money supply, changes in the speed with which businesses filled orders, a rise in weekly unemployment claims and a decline in orders for capital business investment.

Two indicators, credit growth and inventory changes, were not available for inclusion in the index.

For the last five months, the index has been growing at an average rate of 0.8% each month, a pace that would suggest that the economy in six months time could be expanding at an annual rate of around 4%.

Other Viewpoint

However, many analysts believe the index is overstating future growth. Michael Evans, head of a Washington forecasting firm, said he believes that GNP growth will average only 2% this year.

The Reagan Administration is more optimistic, forecasting that the GNP will expand by 3.2% this year, substantially ahead of last year’s anemic 2.5% growth, the worst performance since the end of the 1981-82 recession.

Meanwhile, orders to U.S. factories for manufactured goods climbed 4.3% in February, the best showing in five months, the Commerce Department said today. It said that factory orders, bolstered by strong demand for military hardware, climbed to $194.6 billion in February, following a 5.3% drop in January.

Even without the big rise in military orders, demand for factory goods would have climbed 3.2% in February.