Forecast: Sunshine on Election Day

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But TIME'S economists see thunderheads in interest rates and deficits

When Americans go to the polls, they usually think about their pocketbooks. As much as any other issue, the economy can buoy or destroy a President's chances for reelection. TIME'S Board of Economists met last week to gauge how strong an economic engine Ronald Reagan will be riding into November. The board's verdict: if the financial markets can calm down, the immediate outlook is good. The economy, which grew at a surprising 8.8% annual rate in the first quarter, is sure to slow down, but it is not likely to stall. Said Board Member Walter Heller, who served as President Kennedy's chief economic adviser: "There is plenty of steam left in the boiler."

One way to measure the health of the U.S. economy, suggested by the late economist Arthur Okun, is the discomfort index, a sum of the unemployment and inflation rates. In November 1980, that yardstick stood at 20.2% (12.7% inflation and 7.5% unemployment). On Election Day this year, TIME'S economists predict, the discomfort index will be only 12.7% (5.4% inflation and 7.3% unemployment).

Heller warned, however, of several "thunderheads" that could rain on Reagan's re-election effort or generate hailstorms for whoever occupies the White House in 1985. The dangers include rising interest rates, a gargantuan federal deficit, a plunge in the dollar's value, a cutoff of Persian Guff oil supplies, and increasing turmoil in the financial industry as a result of the near collapse of the Continental Illinois Bank and the continuing troubles that major banks are having with loans to Latin American countries.

The Federal Reserve Board has been fairly tight with the money supply, and since March the prime rate that banks charge for commercial loans has edged up from 11% to 12.5%. Said Charles Schultze, who served as President Carter's chief economic adviser: "The Reserve Board is determined to keep the economy within noninflationary speed limits." The economists predicted that the prime rate would move up a bit more in the coming months, to 13% or 13.5%, and then level off. That would be enough, the economists forecast, to moderate growth. The blistering 8.8% rate of rise in the gross national product in the first quarter was something of a fluke, caused in part by a rapid buildup of inventories. By the fourth quarter, G.N.P. growth is expected to slow to a more sustainable 3.5% pace.

The TIME board agreed that the federal deficit, which threatens to top $200 billion annually for the next few years, is a major force pushing up interest rates. As the economy expands, businesses are increasingly competing with the Government for credit. Said Alan Greenspan, who was chairman of the Council of Economic Advisers under President Ford: "There is a growing cynicism in the financial markets about Congress's ability to control the deficit."