Is the Administration’s GDP Forecast Too Rosy?

There’s been a lot of discussion of whether the Administration’s forecast is too rosy. [1], [2], [3], [4], [5], [6] I thought it useful to examine this issue a bit more deeply.

budget2010a.gifFigure 1: Real GDP q/q growth rate from Administration (teal), CBO without stimulus (red), February Blue Chip (blue), WSJ mean forecast from February survey (pink), and WSJ trimmed high and log (dark red). WSJ trimmed values delete the top five and bottom five (out of 52) respondents. Source: OMB, CBO (March 2, 2009), and WSJ.Note that while the Administration’s forecast is slightly above the Blue Chip, it is slightly below the mean WSJ forecast (February) at least for 2009. And the Administration forecast is well within the 10% trimmed range of forecasts from the WSJ (that is, I’ve cut off the top 5 and bottom 5 forecasts from the 52 respondents for the February survey regarding 2009 y/y growth). In other words, this graph confirms the WaPo conclusion:

…while upbeat, the administration’s forecasts are within the range of reasonable possibilities, according to economists we consulted.

Some discussion of where the Administration’s forecast relates to CBO’s is here. Dr. Romer provides additional insight here. I reproduce a graph from that discussion below:


Figure 1 from “Economic Projections and the Budget Outlook, February 28, 2009.CBO has presented their assessment of the stimulus bill in this report released today. The key graph regarding the impact on the output gap is below.


Figure 1 from CBO, Estimated Macroeconomic Impacts of the American Recovery and Reinvestment Act of 2009, March 2, 2009.Notice that CBO has presented the impact based upon a range of estimated multipliers. Hence, the calculations are transparent.

I will observe an interesting correlation: a good number of those who critique the Obama Administration’s forecasts the most vociferously are also typically the ones who had no criticisms of the previous Administration’s tendency to place off-budgeting process expenditures for Iraq and Afghanistan, as well as emergency expenditures [7]. For additional discussion, see Jeff Frankel‘s comprehensive assessment.

Originally published at Econbrowser and reproduced here with the author’s permission.

One Response to “Is the Administration’s GDP Forecast Too Rosy?”

tjhortonMarch 6th, 2009 at 3:15 am

Eric Sprott says in his months Markets at a Glance:Firstly, they project GDP growth of –1.2% for this fiscal year, i.e. a mild recession. Based on the huge negative revision to 4th quarter GDP just released (which, incidentally, is the first quarter of this fiscal year), for the budget’s projection to be even close implies that the US is already out of recession this quarter and will grow strongly for the remainder of the year! Absolute nonsense, but it gets even more ridiculous. The budget then projects strong economic growth next year of 3.2%, to be followed over the next three years by real GDP growth of 4.0%, 4.6%, and 4.2% up to fiscal 2013. After this period of superlative growth under Obama’s watch, the economy will then return to a ‘normal long term growth rate’ of 2.6% per year thereafter. All told, according to the budget, for the six years 2008-2013 inclusive (a period that includes a severe global financial crisis and a once in a lifetime global depression) the US economy is projected to grow a cumulative 17.1% which, moronically, is even greater than it would have grown if it grew by the ‘long term growth rate’ of 2.6% over this six year period (16.6% cumulative) instead. In short, the depression, the financial crisis and the banking catastrophe are good for the economy!!

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PHåvard Halland is a natural resource economist at the World Bank, where he leads research and policy agendas in the fields of resource-backed infrastructure finance, sovereign wealth fund policy, extractive industries revenue management, and public financial management for the extractive industries sector. Prior to joining the World Bank, he was a delegate and program manager for the International Committee of the Red Cross (ICRC) in the Democratic Republic of the Congo and Colombia. He earned a PhD in economics from the University of Cambridge.