Most economists consulting their crystal balls expect a better year in 1986 than the one just finishing upbut just how much better is a matter of debate. In 1985, real growth was only 2.4 percent, down sharply from the 6.4 percent boom year of 1984, and well below the Reagan administration's guesstimate of 3.9 percent at the beginnning of 1985.
Beryl Sprinkel, the ever-optimistic chairman of the Council of Economic Advisers, expects at least a 4 percent growth rate in 1986. He cites the surging stock market, lower interest rates and a strong growth in the money supply as the main factors.
"We're quite confident that, moving into the year ahead, we will see substantial continued improvement in real GNP numbers and strong trends on the employment front," Sprinkel told reporters.
But most private economists think that Sprinkel is painting too rosy a picture. Some pessimists among them forecast the start of a genuine recession. Others believe that the conomy will continue to be sluggish for much of 1986, but that it will turn out marginally better than the 2.4 percent real growth rate of this year.
The latter group notes that, taken together, the Gramm-Rudman budget-cutting exercise and the tax overhaul (if finally enacted) create a great deal of uncertainty. The federal budget stimulus to the economy will be less as military and nonmilitary programs are scaled back. Morgan Guaranty Bank economists, like many others, think that the ultimate windup to the new initiatives on the budget and tax code will be a bigger tax bill, cutting private demand.
Among the typical and more optimistic assessments by private economistsbut less starry-eyed than Sprinkel'sare those made by Jack Albertine, president of the American Business Conference, and Allen Sinai of Shearson Lehman Bros.
Albertine believes that the Gramm-Rudman Act makes a tax increase inevitable. he says that "the (economic) recovery won't roll over and die next year, as some are predicting," but that the price of a growth rate near 4 percent will be a jump in the rate of inflation to the 5 to 6 percent range.
"The major economic problem facing the country in the new year will be finding ways to cut the billowing federal deficits, and I expect a full-scale war on Capitol Hill as Congress is forced to take the scalpel to some poitically popular programs," Albertine said.
Sinai is less worried about inflation, seeing prices advancing in the 3 to 4 percent range.
Acknowledging numerous risks and uncertainties cited by others, Sinai sees a 1986 growth rate of about 3.3 percent. He counts on lower interest rates, the sharp drop in the dollar since February, 1985, that promises to help American exporters, and a basic shift in the policy of the Federal Reserve. The Fed has given up on trying to target monetary growth, and instead is providing more librication to counteract disappointing results in the economy.
"The politics of economic performance indicate that the administration cannot afford to let the economy deteriorate with elections coming in 1986 and 1988," Sinai said. "The policy moves of recent months are a dead tip-off that the Reagan administration will not wait until it is too late to turn around a weak economy."
That somewhat cynical evaluation is supported by many collateral developments. The drop in oil prices, following OPEC's decision to hold back less of its potential output, will help offset the inflationary impact of the decline in the value of the dollar. Economic profits of corporations (taking into account changes in inflation rates and depreciation allowances) are at the highest level in 25 years, according to Morgan Guaranty. This booming corporate cash flow should support a good level of capital investment next year.
Meanwhile, consumer debt is high, and one might expect consumers to pull in their horns and try to rebuild their savings. But the recent stock-market boom provides at least the illusion of greater wealth, and probably will encorage consumers to keep spending at high levels.
The big question marks relate to the uncertainties caused by budget and tax legislation, and to the dollar and Third World debt. It is true that a declining dollar should be a tonic for American manufacturers, and eventually help slice the trade deficit. But that may not be seen until 1987 or later. And in any event, there would be no benefit from a drop in the dollar if it comes too sharply.
If the dollar crashes, as economist Stephen Marris of the Institute for Internation Economics predicts, it could lead to a panic in world financial markets, and all bets on 1986 and 1987 would be off.
Those huge Third World debts, especially the $350 billion owed by Latin American countries, also are an ever-present danger. Bankers around the world are reluctant to put up the extra $20 billion in loans demanded by Treasury Secretary James A. Baker III. Even though lower interest rates should help immeasurably, a few key nations, including Mexico, are again teetering on the brink. It wouldn't take much to precipitate a new crisis that would compound the problems of an already shaky American banking system.