The Campaign Spot

How Optimistic Are the Obama Administration’s Economic Projections?

Yeek. The government reports the economy contracted by 6.3 percent last quarter.

In today’s Washington Post:

Most experts predict that the economy will shrink in the first quarter at an annualized rate of about 5 or 6 percent, similar to the last three months of 2008.

Recall that the Obama administration’s budget projections assume that the economy will only shrink 1.2 percent this year.

We don’t know what the last three quarters of the year will hold, but if there’s a 6 percent loss this quarter, the economy will have a tough time meeting the administration’s projection for the year. The economy would have to emerge from the recession and grow .4 percent for each of the remaining three quarters of the year to make the projection.

UPDATE: A couple readers have written in wondering about these numbers. I’ll let reader Chad put them in the context of accounting for each previous quarter.

There is a problem with your math, You state that in order to only shrink the economy 1.2 percent for the year, each quarters growth will need to be growing at a rate of 1.8% (4-5 times your stated rate of 0.4%) This is because the quarterly numbers are based on the previous quarters value, and not the value from the beginning of the year. In addition, anything less than 1.8% for Q2 would raise the needs of Q3 and Q4.

Essentially, at the end of Q1, we are at 0.937 times the Beginning of Year economy(X).

Q1 = 0.937X

Q2 = Q1 + 0.018Q1 or 0.954X

Q3 = Q2 + 0.018Q2 or 0.971X

Q4 = Q3 + 0.018Q3 or 0.988X

Which is equivalent to a 1.2% contraction for the whole year.

Bottom line: If the economy shrinks 6 percent in the first quarter of 2009, it’s going to take three healthy quarters to get to the 1.2 percent annual contraction that the Obama administration projected. Chances are, the second quarter will also be rough, requiring even more growth in the third and fourth quarters. And if the third quarter is rough… well, you get the idea.


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