The United States has quietly entered the fourth year of an economic expansion that shows few signs either of ending or jumping onto a faster growth track that would ease some of the continuing serious strains in the economy.
While the consensus forecast for 1986 is essentially for more of the same moderate growth that occurred last year, almost every forecaster notes that there is at least some danger that a serious shock to the world financial system could blow such predictions out of the water.
Many parts of the farming, energy and commercial real estate sectors and some manufacturing companies remain financially strapped. Both business and consumer debt burdens have been growing by leaps and bounds. Many developing nations continue to be unable to pay interest on their international debts when it is due.
As a result of those and other factors, hundreds of financial institutions are under great pressure, and government regulators acknowledge that many are bankrupt and ought to be closed. In the case of federally insured thrift institutions, there is not enough money in the federal insurance fund to pay off depositors, so the institutions are kept open.
Nevertheless, the same warnings were issued a year ago when forecasters were making their predictions for 1985, and the potential disasters were averted, if only by pushing the problems off into the future using one device or another.
Chances are, the analysts say, that no big shoe will drop in 1986 either. But it could, and that is why the forecasts for continued moderate economic growth and moderate inflation are almost universally hedged.
Inflation, which has been running at between 3 percent and 3.5 percent, may accelerate somewhat even if the pace of economic activity continues to rise modestly. The value of the U.S. dollar on foreign exchange markets has dropped sharply, making imported goods more costly -- though a looming decline in world oil prices could offset much of that inflationary impact.
Long-term interest rates have also been falling recently as financial market participants began to anticipate that the Federal Reserve would ease monetary policy and that passage of the Gramm-Rudman-Hollings budget bill would lead to lower federal budget deficits beginning this year.
If rates stay down -- and there are strong indications that the Fed has no immediate plans to ease policy further and major uncertainties about how much budget deficits will be reduced -- business investment and housing construction will become more attractive propositions in 1986.
At the same time, the weaker U.S. dollar is expected to turn around the nation's huge trade deficit. But both changes will spur economic growth only after a perhaps lengthy lag.
In the meantime, increases in consumer spending, which provide a market for about 60 percent of the gross national product, will be harder to come by, most analysts believe.
Consumers have caught up on the buying they postponed during the last recession and the earlier stages of the recovery, and in the process have greatly increased their debt burdens.
No one thinks consumers are going to pull back sharply in 1986, particularly given the increase in household wealth resulting from the big gains in the stock and bond markets last year.
However, they are also not likely to continue to increase their purchases considerably faster than their incomes, as they have been doing for some time.
At least until the interest rate declines have had more time to work, business investment in new plants and equipment seems headed for a small increase at best in 1986.
The latest Commerce Department survey of investment plans, and some private surveys as well, indicate such investment spending might actually fall after inflation is taken into account.
Meanwhile, the drop in the value of the dollar, which makes imported goods more costly to American buyers and makes U.S. exports cheaper to foreign buyers, ought to keep the trade deficit from getting ever larger.
An increase in the trade deficit means that more of the goods being bought by Americans are being produced in other countries -- a development that holds down U.S. production, and thus GNP.
Once the trade deficit stops getting larger, this negative will disappear. At that point, any increase in the demand for goods and services will be filled by U.S. production. When the trade deficit starts to fall, which many analysts expect to happen by the second half of this year, there will be another boost to GNP.
Two other sources of demand for American production this year are expected to be government purchases and additions to business inventories.
Adding all these diverse movements together, the Reagan administration comes up with a forecast of a 4 percent rise in GNP, adjusted for inflation, between the fourth quarter of 1985 and the fourth quarter of this year.
Beryl Sprinkel, chairman of the Council of Economic Advisers, has termed the administration forecast "realistically optimistic." Indeed, some private economists believe that real GNP will rise by more than 4 percent during 1986.
However, most private analysts think growth will be somewhat weaker, say, in the 2.5 percent to 3.5 percent range.
The latter forecast for overall growth is very similar to the 2.8 percent rise in output that the Commerce Department estimates occurred from the fourth quarter of 1984 to the final three months of 1985.
That was well below the Reagan administration's forecast a year ago, which was also 4 percent. Domestic demand for goods and services actually grew closer to 5 percent but the rising trade deficit meant that that demand was satisfied by foreign production.
But the moderate rise in demand in 1985 was still large enough to put a surprising dent in unemployment. Civilian unemployment fell from a 7.3-percent plateau in the first seven months of the year to 6.9 percent in December.
However, some analysts found the drop in unemployment disturbing, given the relatively small amount of economic growth it took to produce it.
Wharton Econometric Forecasting Associates estimates that the total number of hours worked in 1985 rose roughly as much as did GNP, the measure of the production of all goods and services.
That means that despite all the personal and corporate tax cuts of recent years, and all the efforts of American businessmen to improve efficiency of their operations -- including a rapid increase in investment in new plants and equipment during 1983 and 1984 -- productivity gains last year were virtually nil.
The two sources of economic growth are increases in the number of hours worked, which in turn is primarily a function of the number of people with jobs, and increases in productivity, the efficiency with which that labor produces goods and services.
Economist George Perry of the Brookings Institution says that part of the failure of productivity -- output per hour worked -- to increase more than it did in 1985 may have been due to the fact that the manufacturing sector, which usually has the largest productivity gains, was weak compared to other parts of the economy.
But even with such an adjustment, Perry says, "There is really no good news in the '80s as far as productivity behaving well is concerned."
If productivity improvements are small again in 1986, then the 4 percent rise in real GNP predicted by the Reagan administration from the fourth quarter to 1985 to the fourth quarter of 1986 would produce a substantial further decline in the unemployment rate. The administration, looking for a stronger increase in productivity, expects unemployment to fall only to 6.7 percent in the fourth quarter.
Productivity gains are important, too, in determining the size of wage increases employers can grant without driving up their labor costs for each unit of production.
The smaller the productivity increase, the smaller the wage increase that can be paid without either cutting into the employer's profits or being passed on to buyers in the form of higher prices.
Wage increases remained quite modest in 1985. For instance, the Labor Department's index of hourly earnings went up only 3.1 percent in the 12 months ended in December.
However, the index jumped 0.4 percent in November and another 0.8 percent in December, suggesting to some analysts that wage gains could accelerate this year as the unemployment rate falls.
In some parts of the country, such as New England, labor markets are already very tight and wages are being raised to attract more workers. In Vermont, for example, some fast-food restaurants are reported to be considering closing because of the scarcity of people willing to take minimum wage jobs. In Burlington, the state's largest city, some dishwashers are earning more than $6 an hour.
Last year, hourly wages rose 4.9 percent for workers in finance, insurance and real estate category and by 4.5 percent in services, according to the Labor Department index. Those two sectors accounted for about 1.5 million of the nearly 3 million increase in payroll employment in 1985, the department reported.
On the other hand, employment in retail trade rose by more than 600,000 and wages there went up by only 1.6 percent. Manufacturing wages rose 3.2 percent and those in construction only 0.9 percent.
With some acceleration in wage increases and the cheaper U.S. dollar making imports more costly -- and reducing somewhat the competition felt by American producers of goods that compete with imports -- most economists expect some speed up in inflation in 1986.
Last year, prices rose by about 3 percent or a bit more. The administration expects that to go up somewhat, but still remain below 4 percent.
Many private forecasters are just as sanguine about inflation, though a few believe that by the latter part of this year prices will be going up much faster, say, at a 5 percent to 6 percent pace.
There are virtually no predictions of recession in 1986, though a substantial number of economists expect one by some time in 1987.
What would trigger a recession, these analysts believe, would be a period of stronger economic growth and enough of a jump in inflation to cause the Federal Reserve to tighten monetary policy.
Both the rise in inflation and the policy response would mean higher interest rates and a slump in more interest-sensitive parts of the economy, such as business investment and housing.
Some of the forecasters, such as those at Data Resources Inc., also point to the Gramm-Rudman-Hollings deficit reduction law as a source of uncertainty. If the law works even approximately as intended, government spending would fall and that would be a drag on economic activity.
However, if the Federal Reserve responds to the fiscal restraint by easing monetary policy and interest rates fall -- which Fed officials say would probably be the case if the deficit reductions are actually forthcoming -- then the lower rates would offset at least partially the impact of less government spending.