Surging Up from the Depths

TIME'S economists see strong growth but warn of lurking deficits

The economic recovery, which took off with a stunning leap in the spring and summer, has enough momentum to keep it going at least through 1984. Growth will slow a bit but stay strong, and inflation will remain moderate. The unemployment rate will gradually fall. That was the favorable forecast of TIME'S Board of Economists, which met last week in New York City. Said Otto Eckstein, chairman of Data Resources, a Lexington, Mass., economics consulting firm: "Once the economy starts going up, the forces of recovery are so automatic that forecasters can sleep nights. It is about the only time in the business cycle when they can."

The TIME board, though, feared the economy's vigor could lull Congress and the White House into ignoring a critical problem that will eventually threaten the recovery: the burgeoning federal budget deficit, which this year is expected to reach a record $209 billion. Created by a combination of large tax cuts and heavy Government spending, the deficit has given a powerful boost to consumers and helped lift the economy out of recession.

At the same time, however, federal borrowing has kept interest rates unusually high, weakened business investment and driven the value of the dollar to a level that has undermined the competitiveness of U.S. exports. While the economy seems much healthier in the short run, the budget gap may be causing long-term damage that will be difficult to undo. Observed Charles Schultze, a senior fellow at the Brookings Institution in Washington: "We could have a recovery for some period of time fueled by consumption and Government spending but with sluggish investment and exports. That is a miserable kind of recovery."

That concern was shared by Martin Feldstein, chairman of the President's Council of Economic Advisers and a guest at last week's meeting. Said he: "This recovery is very different from past upturns. The fact that more and more people are assuming that the Government will borrow $200 billion or more annually for the next three or four years is bound to keep interest rates and the dollar's exchange rate high. While the economy will most likely continue to grow through the next couple of years, the deficit is undoubtedly increasing the risk that the recovery will run out of steam." He warned that another slump might come as early as 1985.

For the next year or so, however, the recovery looks solid. TIME'S economists predicted that growth in the gross national product, after adjustment for inflation, would slow from its torrid 9.2% annual rate of the second quarter but still glide along at a healthy 4.4% pace in 1984. The unemployment rate is expected to drift downward from its current 9.5% level to 8.2% by the end of next year.