No Joyride in 1989

Like a remarkably rugged, durable automobile, America's economy has motored through some of the harshest possible conditions without losing its momentum. The recovery has dodged hazards ranging from the October 1987 stock-market crash to last summer's drought. The longevity of the expansion, one of the Reagan Administration's proudest legacies, defies all odds. During the past 130 years, the U.S. economy has suffered a recession on the average of once every 4.3 years. But the current growth period, now entering its seventh year, is by far the longest peacetime boom in U.S. history. The economy, says Lawrence Kudlow, chief economist for the Wall Street firm of Bear, Stearns, is "sound and reasonably well balanced."

Yet like any aging vehicle taken to its limits, the recovery is now prone to overheating or breaking down. And the road ahead is not going to get easier anytime soon. In a TIME survey of ten economists in the U.S. and several others in Japan and Europe, a consensus emerged that the economy's speedy growth is, paradoxically, one of its biggest problems. The aging recovery has a reduced tolerance for rapid expansion because it is straining against shortages of workers and factory capacity. Many economists fear those limitations could impose renewed inflationary pressures, forcing the Federal Reserve to tighten the money supply even more than it already has. By hitting the brakes too hard, the central bank could inadvertently stall the economy.

A recession at this point could be more dangerous than in past years. All segments of the U.S. economy -- consumers, corporations, the Federal Government -- are laboring under heavy debt loads. An economic slowdown could become a full-fledged recession if a large number of individuals and businesses started defaulting on their loans and sharply curbing their spending. On the Government's part, the huge budget deficits virtually eliminate its ability to revive a sagging economy by using a spending boost as a stimulant. Moreover, a failure to cut the deficit this year would create instability and pessimism in the financial markets.

While most economists think the U.S. will be able to putter along without a recession for at least another year, they see the hazard as increasingly difficult to avoid. Says Jerry Jordan, chief economist at First Interstate Bancorp in Los Angeles: "Things are going to get very dicey in 1989. It will be the worst of all worlds." Concurs Allen Sinai, chief economist for the Boston Co. Economic Advisors: "This is the first time in perhaps six years that the word recession is in my vocabulary, and I don't take the word lightly. I see one starting late in 1989 and going on until the first half of 1990." According to the median estimate of the ten U.S. economists surveyed by TIME, the U.S. stands a 30% chance of recession in 1989. For 1990 the probability rises to 50%.

The economists forecast that the U.S. gross national product, after adjustment for inflation, will grow a poky 2.3% in 1989, down from an estimated 2.8% last year. The economy will slow as the Fed's tightening grip on the money supply pushes up interest rates. At a growth rate of about 2% or less, most economists think the U.S. can expand without getting out of balance. "This is a slowdown the Fed can be happy with," says David Wyss, chief financial economist for Data Resources.