It's Finally Perfect (At Least for Some) Time's Economists Say Only The

By John Greenwald

Picture the ideal U.S. economy. It would grow at a steady pace but not so fast as to ignite inflation. Unemployment would fall as companies created hundreds of thousands of new jobs every month. Banks would have plenty of cash and be eager to lend it. And, best of all, these happy conditions would last.

All this describes the American economy today, according to the consensus of a panel of five leading economists whom TIME assembled last week to assess the outlook through 1995. Their key finding: after nearly four years of growth that began at a crawl but has settled into a comfortable trot, the prospects for the U.S. economy are now among the brightest since World War II. The country is "in the midst of a long, durable and sustainable expansion" that could prove to be "one of the longest and healthiest upturns in the modern era," said Allen Sinai, chief global economist for Lehman Brothers. Concurred Jerry Jasinowski, an economist and president of the National Association of Manufacturers: "The economy is probably in better overall shape than it's been in a decade."

If Washington doesn't louse it up, that is. What most worried some members of TIME's panel were indications that the Federal Reserve Board, which has already raised interest rates five times this year to forestall inflation, would choke off the expansion by boosting rates more than today's benevolent conditions demand. "If the Fed stays true to historical form, it will continue tightening on and off until we get ourselves into a recession," said David Levy, director of forecasting at the Jerome Levy Economics Institute.

For now, the big winners in the expansion will continue to be not consumers but corporations, many of which have been reaping huge profits after slashing their payrolls and other costs. Just last week PepsiCo said its third-quarter earnings rose 18% over those of a year ago, to $541 million. Motorola's profits surged 50% to $380 million. Chrysler topped both those gains with profits of $651 million, which represents an increase of 54%. Such news helped spark a rally on Wall Street that lifted the Dow Jones industrial average 55 points in a single day and 113 points for the week.

But the TIME Board of Economists predicted that the upturn will spread its benefits more broadly next year as companies reinvest their profits in plant and equipment that creates new jobs. That should help raise standards of living from Boston to Burbank, the economists said. "For Main Street America," Sinai declared, "the best is yet to come."

While none of the panelists foresaw a new outbreak of inflation anytime soon, they differed as to how great the risk might be. Sinai cautioned that the economy has entered a hazardous "zone of full employment" in which companies are producing all that they can and any strong increase in demand could drive up wages and prices. Wages have already begun to spiral higher in industries as varied as insurance and mining, he said. Other panelists, however, discounted the threat. Said Stephen Roach, senior international economist for Morgan Stanley: "The efficiency that's being built into American industry is going to allow the U.S. ample running room to sustain economic growth in the 2.5%-to-3% range for several years without any meaningful inflationary pressures."

As if to second that point, the Labor Department said last week that its gauge of U.S. wholesale prices fell 0.5% in September for the biggest drop in 13 months. A day later the department reported that its Consumer Price Index for September edged up a moderate 0.2%.

TIME's economists predicted that U.S. unemployment, which dipped to a four- year low of 5.9% in September, will be at that level at the end of next year. Said labor economist Audrey Freedman: "The current and future trends in the American labor market are, first of all, a steady growth in jobs, and I think that's going to continue at least through 1995." But at the same time, she noted, "there really have been no increases in real average wages" during the expansion, "and that's going to continue as well."

The low rate of unemployment also reflects a sharp decline in the number of new job seekers. Although the labor force grew more than 2% a year in the 1970s and 1980s as the baby boomers entered the market, it is expanding only about 1% today. "It doesn't take a lot of job creation to get to the low unemployment rates that we have right now," Freedman pointed out.

The panel members predicted that exports of everything from cars to computers will help keep U.S. jobs growing next year. That will be important to take up the slack created by the slowdown in housing construction as mortgage rates have climbed. The economists had little doubt, moreover, that foreigners are becoming very big buyers of American goods. "Most U.S. companies," said Jasinowski, "think their biggest growth opportunities are abroad."

That's largely because the economies of many countries around the world are expanding at least as fast as that of the U.S. Such nations as Taiwan and South Korea, for example, are growing at the astonishing rate of more than 7% a year. Brazil, Argentina and Peru are advancing at more than 4%. With prospects for global commerce so bright, the economists had little doubt that Congress would approve the barrier-lifting General Agreement on Tariffs and Trade treaty by next year.

The board also anticipated the passage of a modest middle-class tax cut in 1995, since both parties would like to see one. But the panel members stressed that any relief to working Americans should be financed by politically difficult cuts in entitlement programs like Medicare. Sinai estimated that the tax break itself might amount to $25 billion. While that would have little impact on the $5 trillion U.S. economy, it could give Bill Clinton a political lift from the group of Americans whom he championed as a candidate.

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CAPTION: The Predictions of TIME's Board

With reporting by Bernard Baumohl/New York