Tuesday, January 20, 2009

Out With the Outgoing Overly Optimistic View on the Economy

EconomPic Data reader Alan directed me to the NY Times 'Economix' post which details the recently released Economic Report of the President. This report is the outgoing administration's view / forecast for the economy. As the NY Times reports, the forecast is that things won't be pretty:

Net job losses in 2009 will be more than twice those in 2008. (Also note that these numbers are based on data collected as of Nov. 10, and do not reflect reports that have come out since then.)
While Alan "gasped" at the bottom chart detailing consumption vs. wealth, I am more taken aback by what I feel is an overly optimistic forecast within the Council of Economic Advisers report. Although some may give the outgoing administration the benefit of the doubt as a lot has happened since November 10th (the date in which the data for the report was finalized), these figures, while ugly, were extremely optimistic even at that date.

As can be seen below, projections are not only for a significantly improved economy by 2010, but an economy growing above levels we have seen over the ten years leading up to this crisis (i.e. when the term "Goldilocks" was running amok). This seems extremely hopeful given recent economic news releases and the uncertainty easily witnessed in the global economy.

projections are for positive growth in 2009 (highly unlikely) and a bounce back to 5% real growth in the next two years (vs. a 2.8% 10 year average)

projections are for a "Goldilocks" 1.5% - 2% CPI rate each year from 2010-2014. This versus a 10 year average of 2.5%. If / when we are able to move from the deflation threat, I don't see how inflation doesn't move well above these levels given the flooding of liquidity already witnessed and massive stimulus to come.

Unemployment Rate: projections are for a spike to 8% in 2009, but a retrace to the 10 year average (5%) by 2012. Most optimistic projections I've seen now call for a 9% peak, while 12% targets are now making the rounds. Either way, 5% by 2012 would be a dream come true.

Non-farm Payroll Growth: While the NY Times remarked that 2009 expectations are for net job losses twice that of 2008, these figures are WAY too low. In December alone, we saw the number of those employed down almost 1,000,000 IN ONE MONTH on a non-seasonal basis. Add the birth /death adjustment that may add ANOTHER million in coming months and their figures are a joke.

While optimists have their place in society (heck, I wish I was an optimist), they don't belong in policy making when the downside risks of getting this wrong are so large. I am hopeful that the new administration is as realistic and open as they have appeared to be leading up to tomorrow's historic inauguration.


  1. Thank you for this realistic look at the huge ills facing our economy and stripping the economic policy community and financial industry of the misrepresentations it continues to make.

    These "leaders" (now even Obama in the Romer report) seem to believe the iconic court martial line from Jack Nicholson, "The truth? You can't handle the truth!"

    Actually, I can handle the truth. What I'm getting sick of handling is the tightly spun misrepresentations of our leaders.

  2. Any doubts about the optimistic forecasts display a terrible lack of faith in our newly-inaugurated savior.

  3. John- quite the opposite actually. These are GBII forecasts... or are you saying they adjusted their figures based on the understanding that the savior was coming?

  4. Jake, thanks for graphing up the numbers in that table and especially for including the 10-year average in each chart. (A question I'm always asking is, "Compared to what?") Those numbers looked way rosy to me also -- odd that someone is still putting out projections of this as a "V"-shaped event. Looks like the numbers could've come from models based on typical business-cycle recessions induced by the Fed raising rates.

    I thought the charts in this post were enlightening.


    I think combining the debt situation (would like to see consumer broken out of all private-sector) plus the massive destruction of household wealth shown in the chart that made me gulp, indicates pretty clearly that consumer spending is unlikely to bounce back very smartly.

    I'm no economist or finance pro but I was living in Tokyo mid 80s to mid 90s. Things are looking all too familiar.