The government's chief forecasting index turned down in October for the first time in 15 months, a sign that the Federal Reserve's tight-money medicine may slow the humming U.S. economy next year.
But a report that the U.S. jobless rate fell to a four-year low last month confirmed yesterday that the economy is defiantly gathering steam, despite the Fed's six interest-rate hikes this year.
The Commerce Department's Index of Leading Economic Indicators, the broadest measure of U.S. economic activity six to nine months ahead, dipped by a tenth of a percentage point, and private economists said the early signs are that it will decline again when November figures become available just after New Year's.
Three consecutive monthly declines would signal that the economy is about to slow significantly, Commerce Department experts said.
"The Fed's six interest rate increases since February are getting ready to bite soon, and we'll start to see some slowing in the first half of next year, but right at this time, on through the end of this quarter, we are probably in the period of maximum growth," said Alfred G. Smith III, chief economist for NationsBank.
Whatever may be in store for 1995, November was another vibrant month. U.S. Bureau of Labor Statistics figures were so strong that they put all economists' forecasts in the shade when they were released yesterday.
The economy added 350,000 jobs to the nation's nonfarm
payrolls, far surpassing the 250,000 most economists had expected.
Unemployment, which economists had expected to hold steady, fell to 5.6 percent in November, down from October's 5.8 percent and the lowest since August 1990.
"These are huge numbers," said Paul W. Boltz, chief economist for T. Rowe Price Associates Inc., the mutual funds house.
"Some economists are now talking about a fourth-quarter growth rate of over 4 percent, which is pretty powerful, so we've still got a lot of wood to chop before this economy cools off," Mr. Boltz said.
"Right now, what we are seeing is that people don't just look at interest rates and say, 'Gee, the prime rate just went up again, I guess I won't buy so many Christmas presents,' " Mr. Boltz said.
"It's more indirect than that and takes more time, but the interest rate increases we're seeing will work their way through the economy, and by the second half of next year you will see growth rates coming down closer to the 2.5 percent that people think the Fed wants."
Wall Street greeted the mixed economic signals with the first burst of enthusiasm it has shown in more than two weeks.
The Dow Jones industrial average gained 44.75 points to close at 3,745.62. Long-term bond prices also rose, driving long-term interest rates back below the 8-percent level that made bonds more attractive than stocks and depressed equity prices for much of November.
The benchmark 30 1/4 -year U.S. Treasury bond closed at a yield of 7.91 percent, down 0.11 percent from Thursday's 8.02 percent.
It is not yet clear whether the week's bond-market action was a cyclical peak for long-term interest rates, economists said.
"It doesn't pay to comment on daily bond movements, but I have thought for some time that long-term bond yields were too high for current economic prospects, and I believe we will see these yields much closer to 7 percent by the end of next year," NationsBank's Mr. Smith said.
Secretary of Labor Robert Reich described the current economy as a "Goldilocks expansion."
"It's not too hot. It's not too cold. It's not hot enough to ignite inflation, but it doesn't seem to be cooling off at all," Mr. Reich said.
Many analysts had expected the index of leading indicators to rise in October, but seven of its 11 components weakened, forcing down the overall index.
The seven that contributed to the decline were raw materials prices, business orders for plant and equipment, weekly initial claims for unemployment insurance, money supply, building permits, stock prices and unfilled orders for durable goods.
Advancing were business delivery times, hours in the average work week, consumer confidence and new orders for consumer goods.
Economists count the index of leading indicators, which has given misleading signals several times in recent decades, as a shaky reed to lean on in the absence of other data confirming the trend, but even yesterday's high-powered labor figures were not without some moderating cross currents.
Hourly wages slipped by 2 cents to a seasonally adjusted $11.22, suggesting that competition for workers has not yet forced most companies to raise wages despite the tightening labor market.
Wage increases have usually been a driving force in inflation, and economists said yesterday that inflationary wage pressures still seem surprisingly moderate despite the economy's powerful October-November surge.
Factory orders also slipped by 0.4 percent, their second consecutive monthly decline.
"We are beginning to see some of the usual very early signs that the Fed would look for as evidence that its tightenings are having some effect," Mr. Smith said.