Economic Question of 1986: / How Long Can Expansion Continue despite Budget, Trade Deficits?
John Cunniff, Ap, THE JOURNAL RECORD
NEW YORK - The big economic question throughout 1986 was how long the expansion, which began late in 1982, could continue to muscle aside budget and trade deficits and a multitude of other threatening problems.
Late in the year, private and government forecasters agreed that recession was not likely in 1987. But, as has been its custom, the Reagan administration expressed an exuberance not found in the private forecasts.
``You can eliminate recession as a major risk,'' Beryl Sprinkel, chairman of the president's Council of Economic Advisers, told reporters on Dec. 8. He predicted six more years without recession.
Over-optimism has become a trademark of White House forecasts. Seeking to correct that stigma, its latest projection of 3.2 percent growth for 1987 represented a decline from earlier estimates of 3.5 percent to 4 percent.
``We want a credible forecast, one we can believe in and one even some of you can believe in,'' said Sprinkel.
The National Association of Business Economists, however, projected 1987 growth of 2.8 percent, vs. a 2.4 percent rate in the first nine months of 1986.
The tendency to expect more from the economy than it can deliver also showed up in the stock market, where price increases exceeded profit increases; in retail sales, which failed to meet expectations; in consumer spending, which exceeded income growth; and in factories, where idle capacity remained.
The pace of economic growth in 1986 was often described as dull and disappointing.
Real gross national product, the total output of goods and services, seemed destined to close the year with a 2.6 percent advance, slightly lower than in the year before. Anything less than 3 percent is considered subpar.
It was enough, though to produce the nation's first $4 trillion-plus economy.
It was a year of surprises, none greater than passage of the Tax Reform Act of 1986, which cut individual taxes but at the expense of a $130 billion, five-year rise in corporate levies.
Inflation in 1986 remained extremely low at 1.9 percent, down from 3.5 percent in 1985. Interest rates fell sharply, to the dismay or delight of various investors, lenders, borrowers and homeowners.
Home mortgage rates, 15 percent at mid-1984 and 12 percent a year later, dropped to single numbers as 1986 ended. And the banks' prime lending rate, 9.5 percent in January, rested at 7.5 percent in December.
The combination of price stability and lower borrowing costs, sometimes reinforced with rebates, kept consumers interested but not as active as retailers would have liked. In big-ticket items it was a buyer's market.
Nevertheless, many sales were dependent upon consumer borrowing, and though some economists observed that consumer assets also rose, two long-term indicators provided evidence of radically changed habits:
- Interest on home-mortgage debt as a percentage of disposable income climbed above 5 percent; and installment-loan interest consumed 3 percent of income left after taxes and necessities. …