Tidbits of Realistic Economic Forecasts from Government Sources

The amount of economic data last week was unusually large. In We Are the Mushrooms of This Economy, I was unable to present all the data.

Congressional Budget Office (CBO)

The CBO last week published "The Budget and Economic Outlook: Fiscal Years 2009 to 2019." This document was based on legislation to date, so it does not include new stimulus packages, provisions for losses in stimulus to date, or postulated effects for future events.

As we all are painfully aware, Congress is economically retarded. So information is presented to them in pictures which are pretty self explanatory. What is interesting is how the CBO is viewing the length of this crisis. Below are some of the graphs from the report:

What is interesting from the above graph is that they are presenting two different budget scenarios – one with and one without stimulus. And the current stimulus program being debated will look steeper than the alternate fiscal scenario. The extended-baseline scenario is presented to Congress so that they understand the effects of the laws they pass. This is CBO’s own words on this subject:

CBO’s baseline projections are not intended to be a forecast of future budgetary outcomes; rather, they serve as a neutral benchmark that legislators and others can use to assess the potential effects of policy decisions. As such, CBO’s baseline budget projections, like its economic projections, do not incorporate potential changes in policy. On that basis, CBO estimates the deficit will decline substantially in 2010 – to 4.9 percent of GDP. Much of that decline will result from smaller outlays for Fannie Mae, Freddie Mac, and the TARP. In addition, CBO’s projections incorporate a significant increase in revenues from the alternative minimum tax (AMT), reflecting the assumption that the exemption amounts for that tax will revert to previous levels (although they have been adjusted annually for the past several years).

The concept you should draw from the above graph is that the CBO is not forecasting the economy returning to 2008 levels for another two years.

You have been hearing over and over about average lengths of recession – all recessions travel the same paths. It is obvious from the above graph that the CBO believes this recession is different, and recovery to December 2007 levels will not occur for two more years.

The data from the CBO is no more valid than anyone else’s. It is my opinion that there are so many unknowns, the size of the problems are so historically large, and the economic fire fighting methods so unorthodox – there can be no meaningful projections of the outcome of this crisis.

But it is interesting that this government agency is not viewing the economy through rose colored glasses – and does not believe we are in a short downturn.

Obama Weekly Address

I enjoy listening to Obama’s weekly address on YouTube. I do it every week. Obama is the best political public speaker since Kennedy. No politician tells the truth – they cannot. They must always show that tomorrow will be better than today. I always try to read between the lines.

Obama said if his stimulus package is not approved:

• Unemployment will go to double digits (spelled depression)
• This recession will linger for many years to come (spelled depression)
• That America will lose its competitive edge (we will become the third world)

I have seen little in Obama’s “stimulus” package that addresses the issue of competitive edge, nor do I see how GDP filling is “stimulus”. I have seen little in the proposed “stimulus” that provides long term employment – in fact, there is a strong argument that the reverse is true.

This stimulus needs to be debated.

Disclosures: None.

Comments

[John Lounsbury:]

It is interesting that the CBO prognosis is for a bathtub shaped recession rather than the usual "V" shape. The graph shows a smaller angle of decline between quarters 5 and 6 (2Q/09) and a bottom end of 3Q/09.

The projection for return to average growth is 2Q/10.

This is all very nice speculation, but it comes from a source with a pretty good track record. However, they have seldom had to make projections with so much information still on the mushoom farm.

Jan 13 06:31 PM

[PainfullyAware:]

"As we all are painfully aware, Congress is economically retarded." - No Truer Words Than These.

The Eye Of The Storm Is Passing.

Jan 14 01:40 PM

[OldLimey:]

"No politician tells the truth – they cannot. They must always show that tomorrow will be better than today."

Difficult to disagree, and as much an indictment of electorates as of the politicians themselves. However, I do wonder whether we have not reached an inflection point so momentous that the public as a whole is paying attention, knows things have gone wrong, knows they've been lied to, and would be less inclined to punish honesty than has been the case throughout the bubble years. Meanwhile, back in the real world....

Jan 14 02:15 PM

[Cameron Mit...:]

Another great read Steve, you are a Guru with the insight. I agree that im not seeing much sustaining growth. I do love the alternative energy and energy effiecient cars, and the broadband connection because its essential. The stimulas does need to be talked about with the public because im sure theirs more good stimulas ideas that will project growth into 2019. I would like to know what their R&D stimulas will look like because thats what will make us competitive with new products, did you see that new robot created in Japan for taking care of their aging population. Brilliant. They also have somthing called HD sound or somthing. Its a new device, but not that i think about it it looks like the ipod and mp3 players have taken the dominant trend.
I look forward to here your stimulating research Steve!

Jan 14 06:28 PM