James Pethokoukis

Politics and policy from inside Washington

America’s Optimist-in-Chief

August 19, 2010

Economist Robert Brusca sums up today’s terrible economic news pretty well:

The day that optimism died. It has a time. It is sort of official: August 19, 2010. … The weak LEI is only bad news of the sort we have been getting. The rise in the jobless claims number posts a 500K number and makes the backtracking official and really bad.  …  But the report that disturbs me most is the Philly MFG index. The Philly index is actually a very good business cycle index. It does this job better than the ISM for some reason I can’t explain. … Optimism has died and there is a reason.  Things are not getting better at even the same rate. Those seeing the economy as getting better are in a distinct and shrinking minority.  … Brace yourself. I’m sorry to be the bearer of this bad news. This is not what I had expected.  I don’t know how much it will shake markets but I’d eventually expect something that can be measured on the Richter scale.

And a bit from JPMorgan:

In light of the recent string of weak economic data including today’s further rise in initial jobless claims, the forecast for US real GDP growth is being revised down to 1.5% for 3Q10 (from 2.5%) and 2.0% for 4Q10 (from 3.0%). This is the second downward revision to growth in 2H10 and the most important one. The new forecast looks for subpar growth through the second half of this year and for a rise in the unemployment rate towards 10%.

The Recovery Summer has turned into the Summer Bummer.  Is the superoptimistic White House taking notice? Perhaps not, given their track record. Brad DeLong and I may disagree on solutions, but he has also noticed the president’s weakness for the sunnyside of things:

Back in December 2008 I thought that prudent macroeconomic policy–policy geared to deal with a 20%-percentile outcome, that could then be cut back if and when it turned out that we had good or even neutral look–involved (a) a $1+ trillion fiscal stimulus, (b) the Federal Reserve taking the size of its balance sheet from $2 trillion to $3 trillion, (c) the Federal Reserve adopting a 3% annual inflation target and taking active steps to hit that target, and (d) the Treasury using its TARP authority to take tail risk on another $1-$2 trillion of risky assets.

We got a real number of $600 billion in effective fiscal stimulus. We really needed more. And we could still have more–(a) requires congressional approval, but (b), (c), and (d) do not and are still on the table.

Perhaps what went on was that the economic advisers gave Obama a 50%-percentile forecast rather than a 20th-percentile forecast, that Obama thinks himself a lucky person who always gets the breaks, and so pushed for policies appropriate to an 80th-percentile forecast?

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