Page 36 - Accelerating out of the Great Recession

THE DAMAGED ECONOMY

adjusted first-quarter 2009 GDP loss released by the U.S. Bureau
of Economic Analysis amounted to –6.4 percent. Furthermore, in
a period when forecasts were corrected downward, the OECD
was already predicting in its Economic Outlook in March that U.S.
GDP would decrease by 4 percent in 2009 and stay unchanged in
2010—an estimate shared by the IMF in its World Economic
Outlook issued in April 2009. Likewise, the Roubini Global
Economics (RGE) monitor predicted a 2009 growth rate of –3.7
percent in April. All of these estimates are significantly worse than
the “stressed” scenario assumed by the Fed.
When analyzing the unemployment rate, the situation is
similar. The Fed assumed a baseline scenario of 8.4 percent
unemployment in 2009 and 8.8 percent in 2010 and a “stressed”
level scenario of 8.9 percent in 2009 and 10.3 percent in 2010.
But the official actual unemployment rate of 8.5 percent in the
first quarter of 2009 already surpassed the assumed “stressed”
first-quarter rate of 7.8 percent. For the entire year, RGE esti-
mated—as early as April 2009—an unemployment rate of 9.5
to 9.8 percent, which was much worse than the assumed rate in
the Fed’s “stressed” scenario. Likewise, in March 2009, the
OECD estimated the annual unemployment rate at 9.1 per-
cent. Its 2010 estimate of 10.3 percent matched the assumption
in the “stressed” scenario. But, as we now know, unemployment
had already reached 10.2 percent by October 2009.
As for housing prices—the last component of the stress test—
RGE showed in April 2009 that the cumulative 2009 and 2010
change in housing prices would be at least as large as the Fed’s
“stressed” scenario of −22 percent in 2009 and −7 percent in 2010.
So for each of the three factors in the government’s bank
stress-test model, the actual data were significantly worse than
the assumptions in the worst-case, “stressed” scenario.

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