Get Set for a Second Wind

From the canyons of Wall Street to the assembly lines of sprawling factories, the performance of the U.S. economy was generating a high level of anxiety and uncertainty last week. The New York Stock Exchange settled into a nervous lull in the aftermath of the record plunge of the Dow Jones industrial average the week before. The Commerce Department reconfirmed that growth in the gross national product was almost completely stalled in the second quarter. Economists, executives and workers all pondered the same questions: Is the U.S. slipping into a recession? Are interest rates headed higher? Is inflation poised for a resurgence?

Despite the ample causes for concern, chances are good that the economy will shake its slump and gather new momentum. That was the consensus of the TIME Board of Economists, which met in New York City this month to discuss the outlook. The economists forecast that GNP growth, after adjustment for inflation, will accelerate from an annual rate of .6% in the second quarter to 2.4% in the last half of the year. For 1987 they predict a sturdy, if not spectacular, 3% growth rate. Said Walter Heller, a University of Minnesota professor who was chairman of the Council of Economic Advisers during the Kennedy and Johnson Administrations: "I am keeping the faith that we will have no recession, the economy won't stagnate, and growth will pick up."

The board members agreed that the Dow's 121-point drop, to 1758.72, on Sept. 11 and 12 did not signal an economic downturn. Alan Greenspan, a Manhattan-based consultant who served as chief economic adviser to President Ford, estimated the Dow would have to go down another 200 to 300 points to have a significant impact on the economy. If stock prices fell that far, executives might curb their companies' capital investment and consumers might reduce their spending enough to trigger a recession. But the stock market steadied last week, rising 3.93 points to close at 1762.65. Investors took in stride the "triple witching hour." On the third Friday of the last month of each quarter, contracts on stock options, stock index futures and stock index options all expire. In the past, the triple witching hour has brought volatile market moves, causing the Dow to rise or drop as much as 36 points. But last Friday the Dow fell a mere 11.53 points.

One reason the TIME economists are not predicting a recession is that the employment picture has improved, even in the face of sluggish growth. In August the U.S. jobless rate fell from 6.9% to 6.8%. It was the third successive monthly decline, and it brought the unemployment rate to its lowest level since January. The economists expect the jobless rate to hover around 6.7% through the end of 1987, far below the 9.7% peak reached in 1982.

The board members expect the economy to avoid a recession because they believe interest rates will remain relatively low. During the past two years, the benchmark prime rate, which banks charge their best customers, has fallen % from 13% to 7.5%. The board believes the full benefit of low interest rates has not yet been felt. The economists doubt that the Federal Reserve will allow rates to move up until the economy is considerably stronger. Indeed, they suggested that the Fed should push down the cost of borrowing a bit more.