Keeping The Pedal to the Metal

By Rosemary Byrnes

Like a champion motorcycle racer, the U.S. economy has managed to keep going under the toughest of conditions. Now in its 65th month, the current period of growth is the longest peacetime expansion in U.S. history. By contrast, the typical expansion of the post-World War II era has lasted 24 to 45 months. Only during the 1960s, when Viet Nam War spending spurred the economy, did a growth cycle last longer -- 106 months -- than the current one has.

The surprise about the present expansion has been its ability to survive one hazard after another. Even the worst stock-market crash in history, the 508- point drop in the Dow Jones industrial average last Oct. 19, failed to throw the economy off course. The expansion's resilience has prompted economists to ask some searching questions: What is keeping growth going? Is the traditional business cycle a thing of the past?

Ironically, one source of the continued health of the economy is the federal budget deficit, $150 billion last year. By reducing taxes while increasing spending, the Reagan Administration has put money into consumers' pockets. And although the U.S. is fighting no wars, Reagan's military buildup has been highly stimulative. Ordinarily, a deficit so large might lead to a steep rise in interest rates that would crimp the economy. But foreign investors and central banks have bought record amounts of U.S. securities, thus helping finance the deficit and keep interest rates under control. Explains Lester Thurow, dean of the Sloan School of Management at M.I.T.: "As long as the Government has the pedal to the metal and as long as foreigners are willing to supply the gas, the expansion will continue. It could last a long time."

In the past, expansions have been throttled down by severe inflation that led to long periods of high interest rates. In recent years, however, a combination of oil-price declines, corporate cost cutting and foreign competition has kept inflation at an unusually low level -- an average of 3.1% from 1985 through 1987. The low-value dollar could lead to a new burst of inflation by driving up import prices, but so far the impact has been minimal.

Economist Sam Nakagama, chairman of the Manhattan-based consulting firm Nakagama & Wallace, suggests that the traditional business cycle may no longer be in operation. Reason: the removal a few years ago of many Government controls on interest rates has enabled the Federal Reserve Board to moderate swings in the economy. By letting interest rates move up and down more freely, the Fed has kept the economy from either overheating or stalling. Instead of going into a classic recession, says Nakagama, the economy has been pausing for short periods to catch its breath before moving to higher ground.

Edward Yardeni, director of economics at Prudential-Bache Securities, also sees an interruption of the business cycle, but for a different reason. Rather than an economy-wide downturn, he says, the U.S. has been experiencing a "rolling recession" that has moved from one sector to another without halting overall growth. While agriculture, the oil business and heavy industries like steel have slumped in recent years, high-tech companies, financial services and fast-food outlets have thrived. Now retailers and stockbrokers may be facing hard times, but farming and manufacturing are recovering.

Nonetheless, three out of four members of the National Association of Business Economists predict that an old-fashioned recession will begin before the end of 1989. They believe the economy will eventually obey that basic law of Newtonian physics: what goes up must come down.

CHART: TEXT NOT AVAILABLE

CREDIT: TIME Chart by Cynthia Davis

CAPTION: GROWTH CYCLES

DESCRIPTION: Growth cycles and periods of recession in months from October 1949 to the Present: artwork shows man holding flat tire; another person on motorcycle.

With reporting by Bernard Baumohl/New York