Back in February, some observers were characterizing the Administration’s forecast as too rosy. Now, the Administration forecast is looking positively pessimistic by comparison to private sector forecasters, at least over 2010.
First, consider the February 2010 forecasts from the Administration (teal squares) against the April 2010 mean forecast from the Wall Street Journal survey (red line).
Figure 1: Real GDP (09Q4 3rd release) (blue), and WSJ mean forecast (red), and trimmed hi/low (gray), and Administration (teal squares) and CBO forecasts (scarlet triangles) (February 2010). Source: BEA, WSJ April survey, CEA and CBO.
Not only have expectations regarding the path (in levels) of GDP risen, the Administration’s forecast is now at the low end of the range of forecasts (I’ve trimmed the top 10% and bottom 10% of forecasts off).
Of course, just because conditions are exceeding expectations back in February (actually, December, since the Administration forecasts were locked down way in advance of the budget’s release) doesn’t mean all is well. One wants to know how much slack there is in the economy. This is shown in Figure 2:
Figure 2: Log output gap; and forecast output gap using WSJ April mean forecast, and trimmed high. Source: BEA, CBO, WSJ April survey.
What this demonstrates is that, taking the CBO’s estimate as given, even now the output gap is on the order of 6 ppts of GDP (in log terms), and will be only slightly under 5 ppts by year-end (4 ppts, using the trimmed high forecast).
We should’ve passed a bigger stimulus package…