Wednesday, April 29, 2009

Politely disagreeing 

Let me gently suggest to my very good friend Ed Morrissey that it's not yet over for the Obama budget and the results of its stimulus plan based on today's GDP report.
This puts a big hole in the Obama administration�s economic projections for the next year, and also for the long term. The OMB based its deficit projections on an assumption that the US economy would return to growth this year, which this GDP puts in severe doubt. With the economy barely moving towards the positive from the worst quarter in 26 years, these numbers look like sheer fantasy...
As Casey Mulligan reminds us, you have to look at a 6.1% decline as it's written, as a seasonally adjusted annual rate. The actual amount GDP fell in the first quarter is 1.56%. 6.1% is the answer to the question: "what would happen if GDP fell 1.56% per quarter for four consecutive quarters?" It hasn't yet. The administration is forecasting a -1.2% change in real GDP year-over-year for 2009. In dollar terms, that's $11,512.2 billion. First quarter GDP clocked in at $11,340.9 billion. That would make real GDP on average for 2009 need to come in around $11,569 billion to make the administration's forecast come true, an average growth rate of 2.7% for the last three quarters of 2009. In contrast, the Blue Chip survey currently expects a 2.6% decline in real GDP, to $11,349 billion, so roughly flat GDP performance from here on. Which of these is true? We don't know yet. (Blue Chip, btw, had a drop of 5.1% expected for Q1; I had penciled in 5.5% in a contest my forecasting class had. Two of seventeen students beat me.)

So everyone expects some numbers to pick up. Inventories got stripped, particularly in autos where consumption of motor vehicles were up at the same time the industry had dropped production to very low levels. Both of these data would indicate that for those firms that survive, it might be safe to bring a few workers back and get production going again. Personal consumption was up overall in Q1, and leaner household budgets seemed to favor more domestic goods, as imports dropped substantially (consuming imports is a drag on GDP.) You don't have to be as optimistic as Brian Wesbury to see something to a turnaround in the offing here. If you visualize an economic cycle like a sine wave, we've moved past the point of inflection and are coasting towards a bottom.

Ed also writes:
Some will say that the stimulus package has not had enough time to work. It passed in mid-February, though, and six weeks of government spending didn�t move the needle. That highlights its greatest weakness: it doesn�t actually provide short-term stimulus. Republicans kept pointing out that most of the spending came after 2009, and half of it after 2010, when by the Obama budget projections the economy would already be in recovery.
The truth on that remains to be seen. The bill wasn't passed until half the quarter was over; projects had little opportunity to start before the end of the quarter. You might argue that there's an expectations effect of higher government spending, but I don't necessarily think that is needed. FY 2009 is supposed to put on $120 billion in new spending, meaning that amount is spent by September 30. The outside lag for fiscal spending (the multipliers) usually have their effects pretty quickly. There's also $64 billion in tax provisions (I dare not call them tax cuts, since you can't cut zero) that should further butress consumer spending. (Source for these data: CBO.) Add zero interest rates to that, and it's not at all out of the realm of possibility that the Obama budget numbers could be right.

It's this current quarter that will tell the tale. For that budget to have any possibility of working, the slide pretty much needs to stop right now. In the recession language we used here for some time, that would be a V recession rather than a U. I would not bet on a V, but I also would not say it's "sheer fantasy".

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