Tuesday, February 02, 2010

The folly of long-range forecasts

Since the Federal Budget is first and foremost on everyone's mind it's worthwhile to consider for a moment just how crazy it is to place any value on economic forecasts out 10 years down the road.

For example, in 2000 when we were generating an operating surplus as a nation, our forecast was for surpluses for the next decade and possible retirement of a large chunk of our outstanding debt by 2010. How did that work out? The dotcom bubble burst, 9/11, 2 wars, housing bubble/burst, bailouts, etc and the annual deficit ballooned to $1.4 TRILLION in 2009 and is projected to grow to $1.6 trillion in 2010. Consider for a moment that in 2000 the total debt of our nation stood at $5.5 trillion. We'll add almost $3 trillion to our debt in just the last 2 years.

Staggering.

Yesterday we received not only the budget projection for 2010 but the long-range forecasts for unemployment, GDP growth and budget deficits. Unemployment (which wasn't going to exceed 8%) is expected to peak at 10% and slowly but steadily fall back below 8% in 2013. GDP is expected to sharply grow from 2.7% this year to 3.8%-4.3% in the next few years (I guess there no double dippers in White House Budget office --- unless you count Peter Orszag!! - Google his name to find out the latest gossip).

I am encouraged by the President's efforts to create a binding budget commission to address the deficits and debt because our current political system is too paralyzed to make the hard decisions necessary to rehab our economy. If the US economy were an automaker, the Republicans would want to on eliminate all models except the black 4 door sedan - cutting revenues 80% is a good thing they'll tell you. On the other hand, the Democrats would want to buy 15 Superbowl ads to tout their new line of boat-cars.

In other words as committee member Alice Rivlin put it "Republicans won't talk about taxes and Democrats won't talk about entitlement cuts." I think Ms. Rivlin may have tipped her hand a bit as well when talking about what the committee may focus upon when she said "The sensible approach is for both parties to work together on a package of long-term reductions in spending growth and increases in revenue, phased in slowly so it wont derail recovery or endanger those already at or near retirement."

Since the recommendations from the committee won't be voted on until after the mid-term elections I think there could be some interesting suggestions in there. If I were a betting man, I wager that a new Social Security retirement age of 70+ is likely to be the key recommendation.

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On a related topic - Get ready to bailout the FHA in the next couple of years....

"The share of borrowers who are falling seriously behind on loans backed by the Federal Housing Administration jumped by more than a third in the past year.

About 9.1 percent of FHA borrowers had missed at least three payments as of December, up from 6.5 percent a year ago, the agency's figures show.

The FHA projects that it will pay out claims to lenders on one out of every four loans made in 2007 -- the worst rate in at least three decades. The claim rate should be nearly the same on the vastly larger volume of loans made in 2008."

Keep in mind that in 2007 roughly 4% of all homes in the US were purchased using FHA loans. In 2009 that number had grown to 18.7%. Source.

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Cheers!

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