White House Looks for Good Economic News In Bad Week – But Look Closely

By Cullen Dirner

Aug 27, 2010 4:24pm

Bad news from the housing market, unemployment lines, and even news that the GDP grew at an anemic rate of 1.6% during the second quarter of this year — a downward revision from the first estimate of 2.4% — didn’t dissuade White House officials from trying to accentuate the positive.

In a memo today, White House press secretary Robert Gibbs pointed out that:

1) that the GDP is still growing, and

2) that government and private sector studies indicate that the growth, however inadequate, owes much to actions taken by the Obama administration, specifically the stimulus bill.

"The GDP revision today confirms what a growing body of independent analysis has found – that the Obama Administration’s response to the economic downturn has kept the economy moving forward," Gibbs said in a statement, calling the 1.6% growth "the fourth consecutive quarter of positive growth."

The press secretary acknowledged that "this level of growth is too slow to generate the kind of sustained job growth our economy needs" but said it "demonstrates in clear form how crucial the Recovery Act has been in continuing to move our economy forward."

But even in the studies the White House was referencing the news was not universally positive.

Gibbs for instance referred to a study by Goldman Sachs senior economist Ed McKelvey, who wrote, “we estimate that this stimulus was a meaningful contributor to GDP during much of last year and the first half of 2010.”

McKelvey’s July report “The Outlook for the U.S. Economy” (read it HERE) praises the stimulus as having been “meaningful” to GDP growth, but he also says he sees "five headwinds that are apt to keep growth slow over the next two to three quarters, if not longer."

Those include:

1)    that the stimulus "will be only marginally supportive in the third quarter, and then turn negative beginning in the fourth quarter and extending through 2011";

2)    anticipated "anemic" hiring;

3)    "subdued" capital spending;

4)    a continued "excess supply of unoccupied housing" which Goldman expects will "persist for quite some time" with perhaps even "an additional 2½% downturn in prices over the next year”;

5)    and the European debt crisis, which he says could impact US GDP negatively by anywhere from 0.20 to 1.90 percent.

Indeed, McKelvey is quite pessimistic, forecasting a mere 1½% annualized growth in real GDP during the second half of 2010 and an unemployment rate that remains in the 9½%-10% range through the end of 2011.

The overall emphasis of the Gibbs memo was that things could be much worse.

Gibbs cited a Congressional Budget Office study from August 24 (read it HERE) that estimated that the stimulus bill increased the number of people employed by between 1.4 million and 3.3 million, and increased “the number of full-time-equivalent jobs by 2.0 million to 4.8 million compared with what would have occurred otherwise.”

The CBO says the stimulus bill increased GDP growth in the second quarter as much as 1.5 percent, Gibbs said. “Without that impact, the economy could have slid into negative territory.”

CBO director Doug Elmendorf noted that the impact of the stimulus “on output and employment are expected to gradually diminish during the second half of 2010 and beyond” with the impact on unemployment “expected to lag slightly behind the effects on output; they are expected to wane gradually in 2011 and beyond.”

Gibbs also referred to a study by former Federal Reserve Vice-Chairman Alan S. Blinder and economist Mark Zandi (“How the Great Recession Was Brought to an End”) which concludes that the actions of the government “probably averted what could have been called Great Depression 2.0. For example, we estimate that, without the government’s response, GDP in 2010 would be about 11.5% lower, payroll employment would be less by some 8½ million jobs, and the nation would now be experiencing deflation.”

Their paper is analysis of the impact of the total policy response — including the Wall Street bailout, steps taken by the Federal Reserve and the FDIC – by both the Obama and Bush administrations.

- Jake Tapper

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