"CBO Prediction: The growth in output later this year and next year is likely to be sufficiently weak that the unemployment rate will probably continue to rise into the second half of next year and peak above 10%."




The $787 billion Stimulus Bill was sold to the American public on the declaration that spending large sums of borrowed money would produce material and quantifiable economic benefits.  The professed positive impact of the Stimulus was to be moderating and rapidly improving unemployment. 

The President boldly asserted that passing the Stimulus Spending Bill would result in unemployment rates which would track the projection included in the chart below.  The graphic is a reproduction of the Administration’s expectations released during January 2009 in the publication entitled “The Job Impact of the American Recovery and Reinvestment Plan”.




Yesterday, four months after the President’s assertion was publicly released and three months after the Bill was adopted, the Director of the Congressional Budget Office testified before Congress regarding the CBO’s expectations for the economy and unemployment rates.  The testimony’s introductory statement is included below but may be skimmed in favor of TheAMD.com cliff notes which follow the excerpt.

CBO TESTIMONY
Statement of Douglas W. Elmendorf
“The State of the Economy”
May 21, 2009

In the Congressional Budget Office’s (CBO’s) judgment, the economy will stop contracting and resume growing during the second half of this year, but the hardships caused by the recession will persist for some time. The growth in output later this year and next year is likely to be sufficiently weak that the unemployment rate will probably continue to rise into the second half of next year and peak above 10 percent. Economic growth over time will ultimately bring the unemployment rate back down to the neighborhood of 5 percent seen before this downturn began, but that process is likely to take several years.

On the positive side, the fiscal stimulus provided by the federal government is now beginning to boost the economy, and financial markets show clear signs of improvement since the fall and winter. Moreover, the sharp reductions seen in manufacturing production will keep inventories to leaner levels than would have occurred otherwise, so that upturns in sales, when they come, will lead to faster and larger increases in output.

However, many factors will temper the strength of the recovery: the loss of household wealth; the fragility of financial institutions; persistently weak growth in the rest of the world; a surplus of housing units on the market; and low utilization of manufacturing capacity. How much those factors will dampen the recovery is uncertain: They may be overcome relatively quickly by the jump start provided by the stimulus and improvements in consumer and business confidence, or they may cause the economy to slump again next year, as the effects of the stimulus begin to wane.

Recently released data are consistent with CBO’s forecast in March that gross domestic product (GDP) will bottom out this year.  Indeed, a wide majority of economic forecasters share that view.  However, CBO’s assessment of developments in the financial system and in the nonfinancial parts of the economy suggests that the initial stages of the economic recovery are likely to be more tepid than the agency had projected earlier.  CBO’s March forecast of 2.9 percent growth in real (inflation-adjusted) GDP in 2010 is more optimistic than the current consensus, as is the agency’s forecast for a peak unemployment rate of about 9½ percent.  CBO is now beginning the process of updating its previous forecast and will release a new forecast in August.

The uncertainty surrounding CBO’s forecast—and the forecasts of private analysts—deserves emphasis. The future course of the economy is always uncertain. Moreover, uncertainty is especially great around economic turning points and in conditions that have not been seen in the economy for some time, such as the current financial crisis.


CBO Testimony Cliff Notes

• We (the CBO) have concluded that the economy will be worse for longer than previously anticipated
• There is material uncertainty around our negatively revised projections given the unprecedentedly dour economic conditions
• The CBO thinks that the stimulus spending is starting to work (in defiance of available data and the direction of our revised expectations) and hopes that the financial markets have improved predicated upon their recent stability
• There are diverse negative forces which may overcome any benefit from the stimulus and cause the economy to slump again next year
• Unemployment will peak above 10% in the second half of 2010 and eventually return to approximately 5% in a process that will take several years

Inferred CBO Unemployment Projections

The CBO’s expectations for unemployment are included in the chart below.  Since specific figures have yet to be released, I have used conservative assumptions based on the Director’s disclosure.  I assume the CBO projects that unemployment will peak at 10.25% in September 2010 and fall to 5% over the subsequent four years.  I further assume that unemployment will be 9.1% for 2Q09 based on the confirmed April figure of 8.9%.




A comparison of the two sets of projections is striking.  Bear in mind that it has only been 4 months since the Obama Administration’s projections were issued and relied upon to pass the Stimulus Spending Bill.




The Stimulus Spending Bill is a fraud, represents the largest discreet waste of money in human history, will directly harm the economy and needlessly burden a potential recovery with an incremental $787 billion in debt.