ROSE-COLORED REAR VIEW MIRROR

Guest contribution from Annaly Capital Management:

Our mother would not have approved of us pointing out other people’s mistakes. It’s unseemly at best, boorish at worst. However, in economic forecasting it comes with the territory, and recently we came across a graph in our files that was so striking that we couldn’t resist. On January 10, 2009, before Barack Obama and Joe Biden were inaugurated, their economic advisers Christina Romer and Jared Bernstein published a brief report in support of the job-creating potential of the American Recovery and Reinvestment Act of 2009, the $787 billion stimulus package that was ultimately passed by Congress and signed into law on February 17. The graph, reproduced below, shows the possible trajectory of the unemployment rate with and without the recovery plan.  We imagine that in an effort to show the effects of the stimulus package in the most positive light, Romer and Bernstein would have shown their worst case scenario in the “without” case and their best case scenario in the “with” case. Clearly, not even their worst case even came close to contemplating an unemployment rate on the scale of what was printed last Friday.

Again, we think it’s unseemly to point out missed calls, but even today we believe Ms. Romer is looking at the world with a hopeful eye. In testimony before the Joint Economic Committee of Congress on October 22, she sketched out her view of the future (abdicating her own macro model and borrowing from the October 10, 2009 forecast by Blue Chip Economic Indicators). It has the unemployment rate peaking at 10.1% in the first quarter of 2010 and coming down to 9.6% by the end of 2010. She might be right this time! But we think her tendency-and she is definitely not alone in this-is to be too optimistic.

Source: Annaly Capital Management