Putting a Tiger in the Tank

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During 1985 the U.S. economy performed below its potential, sputtering along like a Corvette with a clogged carburetor. America's output grew only 2.3%, compared with a full-throttle 6.6% in 1984. But TIME's Board of Economists, * which met last week in Manhattan, predicts that the country will rev its engine again this year. The group believes that the gross national product will expand by about 3.3% during 1986, a brisk if not blistering pace.

The economy's high-octane fuel has been low interest rates. The benchmark prime rate that banks charge for commercial loans has remained steady at 9.5% since it plunged to that level last summer from 13% in mid-1984. Fostered by the Federal Reserve Board, the easier credit has spurred consumer spending and encouraged corporate investment in plant and equipment. "All the signs are strong. We're seeing the fruits of a very substantial decline in interest rates," said Board Member Charles Schultze, a senior fellow at Washington's Brookings Institution who was chairman of the Council of Economic Advisers under President Carter.

Even with the boost from interest rates, the economy would remain a bit lackluster in 1986 if it were not for a lightning stroke of good fortune in the energy market. Since November the global oil-price war started by Saudi Arabia has sent crude prices sliding by about 50%. That decline will be responsible for about a third of this year's growth in GNP and will help control inflation. Said Walter Heller, chief economic adviser in the Kennedy and Johnson Administrations: "The luck of the Irish is working overtime. Now Ronald Reagan can sing, 'Almost everything's going my way.' "

But the song could change to Nobody Knows the Trouble I've Seen if the Administration and Congress fail to deal effectively with a pair of megaproblems: the budget and trade deficits. Government borrowing to cover the budget shortfall could eventually send interest rates shooting back up. Also, the trade deficit could boost interest rates because the U.S. may be forced to borrow more and more money from abroad to finance imports. Heller observed that the Government's record in attacking the twin deficits has so far been "somewhere between lackluster and lousy, but 1986 really looks like a turnaround year."

TIME's board expects that the trade deficit will at least halt its runaway growth and possibly retreat a bit by the end of 1986. The deficit hit a record $148.5 billion during 1985, largely because an overly strong dollar made foreign goods cheap in the U.S. and American exports too expensive in other countries. But last September finance ministers and central bankers of the U.S. and four other industrial powers--Japan, France, Great Britain and West Germany--launched a successful effort to push down the dollar. It has declined by about 12% since then, first at a gradual pace and now at a fast clip. Last week the dollar plunged to 181 yen, a seven-year low against that currency, and to 2.34 West German marks, a level not seen since 1983.

The falling dollar delights U.S. manufacturers because it makes them more competitive with foreign rivals. One negative aspect for American consumers is that the weaker dollar could boost prices of imports, including everything from Sony television sets to BMW coupes.