Friday, December 05, 2008

A few reflections on the budget forecast 

I'm working on this, and will perhaps talk about it with David and Margaret tomorrow, or on Final Word. But let me tip a little bit of where I'm coming from.

The budget turns in no small part on the forecast the state's Finance Department uses. They draw this forecast from Global Insights, a national forecasting firm with a long and distinguished history. They also have been quite bearish on the US economy. As I've noted several times, the budget forecast has turned out to have been a little pessimistic for the current year, and indeed to have our current biennium have $426 million budget deficit when the economy has been in decline for twelve months indicates the Finance people wisely took out an insurance policy against a severe recession, and that policy is now paying off. There will be cuts, but it could have been much, much worse.

GI on November 10 was forecasting 3.3% GDP decline for Q4 according to the WSJ Economist survey. The budget report issued yesterday says GI expects a 1% decline in GDP in 2009. That's worse than the Blue Chip forecast of 0.4% decline. Q4 2009 growth is only 1.2%. You can find more bearish forecasts if you look hard enough.

So the question is, is this reasonable? What I will argue with you tomorrow is pretty much what I've said so far here: A recession that lasts into 2010 would be something we have not seen since the Great Depression, while the current picture has yet to distinguish itself from the 1973-75 and 1981-82 recessions. There are several forecasters trying to hold themselves out as prescient by predicting this recession will be historical in nature. Again, the unemployment rate is 6.7%. That is not historical.