HOW LONG CAN IT LAST?

By GEORGE J. CHURCH

Less growth. More inflation. Corporate profits rising only about half as fast.

That may sound like a dismal forecast for next year--and in another era it would be. In making these predictions, however, members of a specially convened TIME Board of Economists are bubbling with optimism. In 1998, they think, the U.S. will enjoy a stunning sixth straight year of steady growth, relatively stable prices and low unemployment. Yes, the performance will be less spectacular than this year's--but then 1997 has been a vintage year. By almost any other comparison, 1998 should be more than satisfactory.

"Fundamentally, the economy is in remarkable shape," says Martin Zimmerman, director of corporate economics for Ford Motor Co. Allen Sinai, chief global economist of Primark Decision Economics, goes further: "It's terrific. Having a combination of good times on Main Street and Wall Street for so long is rare. This may be the only time in history."

The outlook would be brighter still without the currency crises in Southeast Asia that have thrown economies and financial markets into chaos. Though the 7% break in the U.S. stock market on Oct. 27 was "a greatly exaggerated reaction," in the words of Robert Hormats, vice chairman of Goldman Sachs International, the turmoil will hurt American exports and the profits of U.S. companies heavily invested there. But strong growth at home and in other big U.S. markets--Canada, Mexico and Europe--should offset much of the damage.

Even so, board members agree that forecasts of U.S. output next year need to be lowered half a percentage point or so. Post-Asia, Carl Weinberg, chief international economist of High Frequency Economics, a market and economic analytical firm, foresees a 2.5% rise in gross domestic product, down from 3.6% this year but near the pace many economists think can be sustained year after year. He expects inflation to creep up--but from only 2.3% to 2.8%.

Weinberg thinks that by the end of 1998 unemployment may rise to 5.2%, but Sinai believes it initially might dip just under the 24-year low of 4.7%, registered in October. Either way, labor markets will remain very tight, and that affects almost every aspect of the outlook for next year.

Production will grow more slowly, says Zimmerman, in part because "we're running out of labor." The shortage will also push up wages. Weinberg hopes that much of the increase can be offset by higher productivity resulting from the heavy business investment of recent years (business spending on new plant and equipment has been shooting up 18% a year). Nonetheless, prices will be forced up at a slightly faster rate than in 1997.

Hot competition, though, usually prevents big price increases. So higher wages will cut into corporate profits. Hormats believes companies also will have to spend more on training programs for any additional workers they hire. Even so, Sinai predicts an 8% gain in corporate profits next year. That would be about half the extraordinary 1997 increase but still a robust addition to already record sums.

For the next year or so, there are few strong threats to this cheery outlook. Wall Street periodically frets that the Federal Reserve will raise interest rates. But the Fed held the line at its November meeting, and TIME's economists think it will continue to do so, or at worst will raise rates only slightly. Fed Chairman Alan Greenspan might like to boost them more to head off any future inflation, but he will likely fear that that would worsen the impact of Asian troubles on U.S. financial markets.

Though most of the Oct. 27 drop in the stock market was recouped the next day, prices have remained volatile. Sinai thinks, however, that the Dow Jones industrial average would have to sink to 7000 (vs. levels over 8200 at its August peak and about 7700 in mid-November) and stay there for a year to make people feel so poor that they would cut consumer spending sharply. Weinberg, meanwhile, sees a silver lining in market volatility. It may dissuade "Gladys and Gary in Indiana" from borrowing from their mutual fund or ira to buy a car or house. That might help keep consumer spending and debt from climbing at inflationary speed.

Longer-range, the worries for the U.S. economy are more global than homegrown. Japan is the major world trouble spot. Since 1990, it has suffered from sluggish output growth, a stock-market depression and a credit crunch. Now chaos in Southeast Asia endangers Japan's exports and loans to the area. Japanese investors, desperate to raise cash, might someday dump holdings of American securities; that would knock down stock and bond prices and shoot up U.S. interest rates. Weinberg sees a 1-in-100, but rising, chance of that happening--but contrasts that with a 1-in-1 million risk a year or so ago.

Another big imponderable is the likely effect on European and world economies of the scheduled 1999 replacement of 10 to 12 European national currencies by a common unit of money, the euro. On the more parochial subject of the effect on U.S. business, Hormats thinks the switch to a common currency will reduce costs enough for European companies to make them more competitive with American firms. But Zimmerman believes the effects on balance will be favorable. Companies exporting to Europe from the U.S. or from plants in, say, Germany or Italy need not worry about how many lire a mark might be worth next year. They can set a single price list, in euros, for the whole Continent.

A more serious problem is president Clinton's failure so far to obtain fast-track authority to negotiate multilateral trade deals. Because he knew he would lose, the President asked the House to postpone a scheduled November vote on that authority, which would have enabled him to strike trade bargains that Congress could accept or reject but not amend.

Lack of fast-track authority will have little effect immediately. But it might prevent Clinton from negotiating agreements that would keep U.S. exports increasing in later years. And exports are a far bigger part of the U.S. economy, and a much more potent factor powering recent growth, than the public--or Congress--generally realizes.

Sinai figures that exports account for 12.4% of gross domestic product, a slightly bigger share than in Japan. They contribute $1 trillion to the U.S. economy, vs. $280 billion from residential construction. Hormats adds that exports are a great "creator of jobs, particularly high-quality jobs. The average job in the exporting sector pays significantly more than the average job in the overall economy."

Freer trade can wipe out jobs too, by increasing imports. But Zimmerman asserts that U.S. markets are generally far more open to imports than foreign markets are to American goods and services. The U.S. thus stands to gain more than it would lose from any deals that open markets on both sides a bit wider still.

Hormats further emphasizes "the links between finance and trade. Robust stock and bond markets around the world are predicated on an open, stable and expanding global trade environment." The financial markets have been thriving over the past several years largely because global trade and investment have also been growing. If major countries now "turn inward on trade issues, that can't help having an adverse effect on global [financial] markets."

All these, however, are worries primarily for 1999 and later years. The American combination of fast growth, high employment and low inflation, maintained for years on end, is so extraordinary that economists all over the world are wondering how much longer it can last. The answer, to TIME's panel, seems clear: one more year, at the very least.