The Bush Administration’s last Economic Report of the President[large pdf] was released on Friday. From Chapter 1:
The Administration’s forecast calls for real GDP to continue to fall in the first half of 2009, with the major declines projected to be concentrated in the fourth quarter of 2008 and the first quarter of 2009. An active monetary policy and Treasury’s injection of assets into financial institutions are expected to ease financial stress and to lead to a rebound in the interest-sensitive sectors of the economy in the second half of 2009.
Part of the Bush CEA’s optimism (relative to other forecasts , ) is based upon this correlation:Chart 1-9: From Economic Report of the President, 2009Chapter 1 pdf.The regression suggests that if the decline in output is severe, then the rebound will be strong. If, on the other hand as indicated in some forecasts, , the peak-to-trough decline in output is 2%, then the rebound will be right about on mean value of 4.6% for two years (in other words, we’re right on the dashed lines in the chart).My one observation is that the last two recession observations (’90-’91; ’01) are substantially below the regression line. One aspect of the 1990-91 recession that seems particularly relevant is the fact that it was accompanied by a capital crunch — that is a crisis that required injections of capital into the banks. In that sense, that recession was conjoined with a financial crisis and a housing crash (see IMF analysis discussed here). So, while I’m hopeful, I’m not too sanguine . Originally published at Econbrowser and reproduced here with the author’s permission.
Edwin G. Dolan is an economist and educator with a Ph.D. from Yale University. Early in his career, he was a member of the economics faculty at Dartmouth College, the University of Chicago, and George Mason University. From 1990 to 2001, he taught in Moscow, Russia, where he and his wife founded the American Institute of Business and Economics (AIBEc), an independent, not-for-profit MBA program. Since 2001, he has taught at several universities in Europe, including Central European University in Budapest, the University of Economics in Prague, and the Stockholm School of Economics in Riga, where he has an ongoing annual visiting appointment. During breaks in his teaching career, he worked in Washington, D.C. as an economist for the Antitrust Division of the Department of Justice and as a regulatory analyst for the Interstate Commerce Commission, and later served a stint in Almaty as an adviser to the National Bank of Kazakhstan. When not lecturing abroad, he makes his home in Washington's San Juan Islands.
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