For a good, clear assessment of the American economy, you won't do better this summer than the survey just published by the Congressional Budget Office. The CBO's view is less interesting for the usual optimistic forecast of steady economic expansion than for the careful inventory of the uncertainties that jeopardize it.
The CBO cites four major sources of doubt that must hang over any forecast. There is the dollar's exchange rate, which depends mainly on foreign investors' confidence in the dollar. If anything should happen to damage that confidence, the dollar could drop very fast. Another question mark is the price of oil, which has dropped a little this year and may drop a great deal farther. A third is the stability of the American financial system, already under strain with the number of bank failures rising. The fourth is the effect of the rapidly rising money supply on the real world of jobs, prices and production. That relationship has become wildly unpredictable; the Federal Reserve Board, which has been expanding the money supply, has no real way of knowing whether it has gone too far or not far enough. If it allows the money supply to rise too fast, it risks another cycle of inflation. If it doesn't go far enough, it risks a recession.
The Federal Reserve this summer is going to extraordinary lengths to head off a recession. It clearly thinks that a recession is a far more dangerous prospect for the country, and the world, than a renewal of inflation. Is it right?
That's the key question in American economic policy now, and the CBO does not choose to address it directly. To put it another way: could the United States go into a recession next year and expect to recover with its usual buoyancy? The CBO's survey suggests that Americans would be unwise to take that for granted.
In a recession, with business profits falling, foreign investors would send less of their money here. That would result in a falling dollar, which in turn would immediately generate both higher inflation and higher interest rates. That would be a disaster for the indebted Latin countries, and raise the prospect of a wave of defaults -- a subject that the CBO does not touch but which is never far from the thoughts of anyone doing economic forecasting. The pressure on the banking system would increase, reflected in more failures. Each of these strains, aggravating the others, would interfere with the normal mechanisms of recovery. The CBO says that it expects business in this country to pick up in the remaining months of this year, and to continue "at a moderate pace" in 1986. Maybe so. But it also describes an economy badly out of balance, with less than its past ability to recover if that optimistic forecast should prove wrong.