The Zesty Forecast for '85

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TIME's economists viewed last week's dip in the dollar as a healthy development, but said that a sharp plunge could be dangerous. Admitted Greenspan: "The dollar has long been a great worry of mine." If foreigners lost confidence in the dollar, they might start pulling large sums of money out of American investments. That could lead to a run-up in U.S. interest rates and slower growth than the economists now predict.

The TIME board members doubted, however, that last week's drop signaled the beginning of a sustained decline in the dollar. Its value is still more than 60% higher than it was five years ago against an average of major currencies. Said Charles Schultze, who was President Carter's chief economic adviser: "I do not see the dollar in a free fall. Central bank intervention by itself in the markets is not likely to do any good in the long run." Rimmer de Vries, chief international economist of New York's Morgan Guaranty Trust, thinks that the dollar may remain strong because foreigners are eager to invest their money in the vibrant U.S. economy. Said he: "No other major Western nation has had such a combination of high growth and low inflation."

A fall in the dollar would delight many American businessmen. Its rise has made their products more expensive abroad and foreign goods cheaper in the U.S. That has hurt every company that exports or competes with imports. Largely because of the strong dollar, the U.S. ran a record-shattering $123 billion trade deficit last year, up from $69 billion in 1983. The trade gap widened to $10.3 billion in January from $8 billion in December. Such a huge imbalance is unsustainable, TIME's economists agreed, and could eventually undermine U.S. growth.

On the other hand, the strong dollar has played a key role in dousing inflation. Faced with fierce competition from cheap imports, companies have been forced to cut costs and hold down prices, and workers have had to settle for modest wage hikes. Consumer prices rose at an annual rate of just 2.3% in January, which was even lower than the 4% increase for all of 1984. The economists predicted that prices will rise only 3.6% this year.

Low inflation has given the Federal Reserve the latitude to be fairly generous with the money supply and let interest rates fall in the past few months. A decrease in mortgage rates, from an average of 12.67% for a 25-year adjustable-rate loan last September to 11% now, has given pep to the bellwether housing industry. Between December and January, housing starts climbed 14.9% to an annual rate of 1.8 million, the sharpest rise in ten months.

The building surge could give a far-reaching boost to the economy, creating jobs in industries that manufacture everything from roofing to rugs. That will be a boon to the 8.5 million Americans still out of work. TIME's economists forecast that the unemployment rate will fall from 7.4% now to 6.8% by the end of the year.

Walter Heller, who was chairman of the Council of Economic Advisers in the Kennedy Administration, predicted that corporate profits would rise 8% this year. That should help companies continue their heavy spending on new plant and equipment. Business investment jumped 21% in 1984, and Heller expects a 12.5% rise this year.