Thursday, March 05, 2009

President's Unemployment Forecast Much Too Rosy

In looking over President Obama's proposed budget for fiscal year 2010, I found Table S-8 Comparison of Economic Assumptions particularly interesting. As the name implies, this table compares economic assumptions under the proposed budget to the Congressional Budget Office's assumptions and to the Blue Chip forecasts. What really stuck out to me were the forecasts for the unemployment rate.

The Blue Chip consensus forecast is for the unemployment rate to peak at 8.7% in 2010. The Congressional Budget Office predicts it will peak at 9.0% in 2010. However, the president's budget predicts the unemployment rate will peak at 8.1% this year and then fall to 7.9% in 2010.

Admittedly, the Congressional Budget Office ignores the possibly beneficial impact of the American Recovery and Reinvestment Act. Even so, the president's forecast seems much too optimistic, especially since he is also proposing to raise taxes on the people who do most of the investing in this country.

The government cannot create jobs nearly as efficiently as businesses can. However, by raising taxes on the investment class, the president is virtually guaranteeing that more people will find themselves out of work.

The unemployment rate was 7.6% in January. Tomorrow morning, the Bureau of Labor Statistics will report the unemployment rate for February. The consensus estimate is 7.9%. I have been warning since last September that the unemployment rate would reach 8-9% by June. I think the average for 2009 could exceed 8.5%. This is considerably higher than the president's forecast. Unfortunately, I think it is also much more realistic.