Out with The Old, In with the Blue

By Gordon Bock

Ushered in with upbeat forecasts and a general mood of economic confidence, 1987 went out on a harsh note of uncertainty and apprehension. Last week the dollar went the way of the New Year's Eve ball in Times Square -- down. Its descent pummeled the stock market and fanned fears about America's economic future. Retailers said consumers were cautious during the Christmas shopping season. The usual last-minute buying surge averted a disaster, yet sales in November and December were lackluster at best.

Most troubling was the continuing decline of the dollar, which hit its lowest level in more than 40 years against the Japanese yen and the West German mark. On New Year's Eve, the dollar fetched only 121 yen, vs. 159 yen a year ago. The plunge was especially unsettling because it came less than a week after the Group of Seven (the U.S., Britain, Canada, France, Italy, Japan and West Germany) issued a statement saying the dollar had fallen far enough. The central banks of some of these nations have been buying dollars heavily in exchange markets, but currency traders doubt that intervention can keep the greenback stable for long.

The markets also shrugged off a statement issued by the White House. Its major point: "The United States wants to see stability in the dollar." Despite such jawboning, the world's moneymen seem convinced that the dollar cannot strengthen as long as the U.S. trade deficit, estimated at a record $175 billion in 1987, keeps rising. Says Japanese Finance Minister Kiichi Miyazawa: "There may be a feeling that one cannot quite believe that the U.S. trade balance is really going to improve."

Anxiety over the dollar quashed a year-end stock rally. Just two weeks ago the Dow Jones industrial average broke 2000 for the first time since Nov. 2. But last week the Dow sank 61 points. It closed 1987 at 1938.83, up 43 points for the year.

Consumer confidence has suffered along with the market. Reports indicate the dollar value of Christmas sales will wind up 2% to 5% higher than 1986 levels. Because inflation was an estimated 4% to 5% in 1987, sales volume was thus essentially flat. Many stores did well, but it generally took steep discounting to entice shoppers to buy. Even on Beverly Hills' Rodeo Drive, signs proclaimed price cuts of up to 50%. Says Faye Ahrabi, assistant manager of the Chatelaine boutique on Rodeo: "If you didn't have a sale, you didn't make money." The situation is unlikely to improve soon. Says Bernard Brennan, president of the 315-store Montgomery Ward chain: "We think next year is going to be difficult."

If consumer spending continues to falter, a recession could follow. One barometer of future trends, the index of leading economic indicators, fell 1.7% in November, its steepest slide in more than six years. Economists noted, however, that falling stock prices accounted for much of the decline. The fate of the economy may depend on what happens to the trade balance. Most experts expect that the dollar's fall will lead to a surge in exports and a drop in imports. If that happens, less domestic consumer spending will be needed to keep the economy healthy. "There is a risk of recession in 1988," concedes Lawrence Chimerine, chairman of the WEFA econometric forecasting firm in Bala- Cynwyd, Pa. "But my bet is we'll just scrape past it." Not exactly optimism, yet with the year off to a sputtering start, it will have to do.

CHART: TEXT NOT AVAILABLE

CREDIT: TIME Chart by Cynthia Davis

CAPTION: DOLLAR DELUGE

DESCRIPTION: The value of U.S. dollar in yen, Dec. 1 - Dec. 30, 1987. Color illustration: Rain pouring from clouds onto White House.

With reporting by Raji Samghabadi/ New York and David Wilson/Los Angeles