The Amazing Boom Machine

It was a week that started a million telephones jangling. Eager investors rang their brokers to buy stocks, driving the Dow Jones industrial average up a record 92.91 points to an all-time high of 1792.74. Happy homeowners phoned bankers to refinance their mortgages at interest rates not seen since 1978. Economists called up clients to report that U.S. growth will be more robust than almost anyone had expected. Corporate treasurers got on the speakerphones with their investment bankers in New York City to talk about financing bold projects with multimillion-dollar bond issues.

Bullishness was busting out all over. Nearly everyone from consumers to financiers was celebrating the belief that the 40-month-old economic recovery, which had slowed late last year to a 1.2% annual growth rate, is accelerating to a faster pace of 3% or more. Even better, many experts think the industrial world's economies are entering a new era, in which low oil prices are triggering a whole series of positive trends, thus creating a boom machine that could hum smoothly for several years.

The machine first started to crank up in 1982, when oil prices began to fall. Cheaper energy helped pop the inflation bubble, which in turn enabled Federal Reserve Chairman Paul Volcker and his counterparts in other countries to let interest rates decline. That development sparked a long-running bull market on stock exchanges from Wall Street to Tokyo. And when oil prices went into a steep decline over the past three months, the boom machine shifted into high gear. Says James Sweeney, director of the Center for Economic Policy Research at Stanford University: "We see a significant number of happy events."

Taken together, the positive forces have created what Economist Dimitri Balatsos of the Kidder Peabody investment firm has called a "virtuous cycle." This cycle is a mirror image of the vicious spiral of the 1970s, when soaring oil prices and roaring inflation created rising unemployment, slumping stock prices and economic stagnation. Now things are going the other way. Exults Barton Biggs, chief portfolio strategist for the Morgan Stanley investment firm: "It's like watching the movie of the 1970s run backwards."

While falling petroleum prices have grabbed most of the attention, an army of other friendly forces are at work. The decline of the U.S. dollar by about 30% since its peak in February 1985 will help beleaguered U.S. exporters boost business by making their products more competitive with foreign rivals. Meanwhile, the decline in global interest rates will ease the burden on staggering debtors, ranging from U.S. farmers to developing countries like Brazil and Argentina. And even one of the thorniest problems of them all, the U.S. budget deficit, is becoming slightly less severe.

Cautious forecasters point out, however, that the boom machine still has a few weak spots. The oil bust, for example, has threatened the stability of energy firms and banks in the Southwest. "There are always things that can go wrong," concedes Beryl Sprinkel, chairman of President Reagan's Council of Economic Advisers. "But I'd say they are minimal at the present time, and the things that can go right are pretty evident."