The Zesty Forecast for '85

After surging, stumbling and then bouncing back last year, the U.S. economy should settle down to a steadier, healthier pace in 1985. That was the optimistic forecast of TIME's Board of Economists when it met to survey the business outlook for the year. Despite concern about the instability of the dollar and the huge U.S. trade and budget deficits, the economists predicted that growth in the gross national product, after adjustment for inflation, will be a solid 4% this year, a middle course between the harrowing extremes of 1984. Growth last year ranged from 10.1% in the first three months down to 1.6% in the third quarter, which briefly raised fears that a recession was on the way. This year should be less packed with drama and trauma. Said Board Member Alan Greenspan, a New York consultant who served as chairman of the Council of Economic Advisers under President Ford: "The forecast is for moderate growth, moderate inflation and moderate unemployment."

The year is already off to a strong start. The Commerce Department said last week that the index of leading economic indicators, which tries to foretell future growth, climbed 1.7% in January, its sharpest advance in 18 months. That report electrified the stock market, where investors went on a buying binge. The Dow Jones industrial average jumped nearly 26 points during the day, to 1309.96, before falling back to a record close of 1299.36, which topped the peak of 1297.92 set on Feb. 13.

The optimism in the financial markets was tempered by worries about the fate of the dollar, which last week gyrated wildly. At first, it took off on its swiftest, steepest climb since 1978. By Tuesday afternoon it had risen 2% against the West German mark and the French franc and more than 3% vs. the British pound, which sank to an all-time low of $1.039.

Then currency traders were taken aback by bulletins concerning the testimony of Federal Reserve Chairman Paul Volcker before a congressional committee. Volcker said that Western central banks had not acted "forcefully enough" to halt the dollar's ascent. Some traders took that to be a call for stepped-up Government intervention.

As if on cue, the central banks of West Germany, Britain, France and all the other major industrial countries launched a joint campaign to defend their currencies by selling dollars on the exchange markets. Though the Federal Reserve would not publicly confirm it, the U.S. joined the battle to rein in the dollar. Said a senior Administration official: "We spent tens of millions and the Europeans spent hundreds." By Wednesday afternoon the banks had unloaded at least $1.5 billion and sent the high-flying dollar into a nose dive. It dropped 4% compared with the mark and franc and 6% against the British pound. Even Queen Elizabeth II seemed stunned by the pound's sudden swings. Said she: "It all happens so frightfully quickly."

The official intervention in the currency markets continued on Thursday and Friday, but the dollar stabilized and recovered a bit. Still, central bankers seemed satisfied with the results of their efforts. Their goal was merely to throw a scare into speculators and keep them from bidding the dollar to unrealistic levels.