Economic Doldrums

MOST statistics released this week on the United States economy have been disturbing. The government's report yesterday on the index of leading indicators showed the index rising a tiny 0.1 percent.

The Commerce Department reported a construction slump in April. After the bad weather in March, many economists predicted a pickup. Instead, construction spending took its worst tumble in eight months.

Furthermore, the US manufacturing sector grew only modestly in May after a decline in March. The National Association of Purchasing Management said a faster rate of new orders will be needed for the economy to improve at a much more vigorous pace.

Nor have Americans been acquiring the financial resources to give the recovery a good boost. They did spend more in April. Personal consumption expenditures jumped 1 percent, the strongest increase in six months. But personal income stagnated in that month after a string of four consecutive monthly increases. Economists say consumers can dip into their savings for a time to cover rising purchases. Nonetheless, stronger job and income growth will be needed to maintain a higher spending pace.

And last week's economic news wasn't any better. For one thing, the estimate of growth in national output in the first quarter was cut in half.

What's wrong with this recovery? Why doesn't it show some zip? One reason is that the cuts in defense spending are biting hard into economic activity.

Another cause could be concern about the Clinton administration's tax program, which has just passed the House and awaits Senate consideration. Deficit reduction, though welcome, means higher taxes and spending cuts, each of which can act as a drag on the economy. However, fears may be exaggerated. A study by DRI/McGraw-Hill reckons the energy tax, one important facet of the program, would reduce real national output by only 0.1 percent annually through 1998, add a tiny 0.1 percent to the annual inflatio n rate while it is being phased in, and contribute $69 billion to deficit reduction from 1994 to 1998. So far this fiscal year, the federal deficit is running about $10 billion behind the previous fiscal year.

Another factor in the slowdown is the trickle of new money into the economy. The Federal Reserve System has been buying a goodly amount of government bonds to boost bank reserves. But the broad measures of money have been shrinking for at least six months, an extraordinarily risky trend in a weak recovery.

The Fed seems fixated these days on an upward blip, probably temporary, in the inflation rate. It isn't paying sufficient attention to the high unemployment rate and pitiful recovery.

In the past few weeks, the money supply has started growing again. Some economists hope the growth signals more action in the economy in the months ahead. Given the uncertainty, however, the Fed should ease monetary policy again. Another recession would be most unwelcome.