'85 economy has eased, the outlook is upbeat, but problems persist

AS the nation moves into the summer months, it's a good time to check the first half of 1985. The economy continues to grow, but its progress for about a year has been slow enough for this period to look like a growth recession.

Congress continues to battle with the budget deficit, not yet with much success. Tax reform has moved from the Treasury I to the Treasury II proposal, but it is far from becoming law.

And the United States trade deficit continues to climb: It rose to $12.7 billion in May, the second highest in history. The deficit has worsened, even though the dollar has fallen from its heights of last winter.

The ability of the economy to pick up speed in the second half of the year depends on the willingness of consumers to increase spending. Consumer debt is already at levels equal to or exceeding those at the onset of other postwar recessions.

But totals or averages don't tell the whole story here. A new generation is now in a household formation stage. In most young families, there are two wage earners. A higher proportion of these families is borrowing than in the past, which makes the totals for the economy higher. But this does not necessarily mean that the exposure per family is at peak levels.

With interest rates having declined for several months, the sectors of the economy that benefit from lower rates are at least in a position to do better. Frank Mastrapasqua and Lawrence Horan, writing in the current Smith Barney bulletin, contend that the immediate course of the economy depends on whether consumers are willing to borrow more.

``The consumer's willingness to borrow is largely a question of confidence in the future prospects for income growth and employment. . . . Given lower rates, `easier money' and no material change in confidence, some increase in borrowing, especially in the mortgage markets, appears likely. These circumstances could lead to continued above-trend growth in real consumer spending.''

The budget impasse is being well publicized as Congress takes a Fourth of July break. The elements of a solution have been clearly identified for months now -- reduced growth or no growth in defense spending and some holdback on the cost-of-living adjustment for social security. Depending on how much urgency congressmen sense back home, progress could be swift upon their return to Washington.

The tax-reform proposals have run into the trouble one would expect. Myriad groups are pointing out the inequities inherent in dismantling the existing system and starting over, as it were. And the more concessions get made in the plan, the less likely it is that it will emerge in anything like its original proposal, if it emerges at all. A new flaw that is appearing is in the original arithmetic regarding its revenue neutrality. If it's still another revenue loser, Congress has further reason to go slow with it.

What Congress may not be so slow to react to is pressure regarding the trade imbalance. Month after month US manufacturers are losing ground to overseas producers. Much of this started as a result of the overvalued US dollar. But as businesses adjust by putting more plants overseas or simply turning to activities at home that are not import-sensitive, a restructuring of the US economy is taking place.

Both business and labor groups have the ear of Congress on this issue. With a weakened manufacturing sector increasingly seen as the Achilles' heel of this economy, Congress may be more inclined to enact protectionist legislation before the year is out.