AT THE BEGINNING of the year, there was a broad consensus among forecasters that the U.S. economy would grow strongly in 1986. The Reagan administration thought so, as it always does, but other people with no political interests agreed. And yet the growth rate last winter was only modest and in the spring, by all indications, it was even lower. The optimists still expect an acceleration over the summer and fall, but the evidence for it seems increasingly fragile. Where did last January's promising forecasts go off the track?
The most serious of the disappointments has been in foreign trade. The foreign sector has become a substantial and persistent source of error in American economic forecasting, not only within the administration but among independent scholars as well. One reason is that the United States has never before run trade deficits on the present gigantic scale. Experience is the basis for economic analysis, and in this case there is very little experience to go on. Beyond that, the government's statistics on foreign trade are notoriously unreliable and apparently are getting worse as the Commerce Department tries to save money on its obsolete reporting system.
More important, there's been a central failure of policy -- not on the part of the Reagan administration this time, but by the Japanese and especially the Germans -- that is contributing to poor economic performance here. Last winter most American economists assumed that, as the U.S. dollar's exchange rate fell, Japan and Germany would respond rationally with forceful action to speed up their own economies and keep trade expanding worldwide. Instead they have done very little. As a result Germany has slowed down, and Japan is evidently going into a recession. It means that there is less demand for American exports than the United States expected six months ago. If this slowdown develops into a world recession next year, Japan and Germany will bear a heavy share of the responsibility for it.
In this country the government published figures this week showing that retail sales have been rising steadily while industrial production is actually lower than a year ago. How can consumption rise while production falls? The explanation is the foreign trade deficit. Imports fill the gap. Because production is falling, there's plenty of spare capacity in American industry, and businesses have been cutting back new investment. Business investment is one of the key determinants of economic growth, and falling investment is not a healthy sign. As long as the trade deficit remains sky high and business investment continues to slide, it's very hard to see what could produce faster economic growth in this country, or in the world.