Optimism Ain't What It Used to Be

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Sunday, 16 June 2013 13:44

The NYT ran a piece telling readers "even pessimists feel optimistic about the American economy." What is striking is the nature of the optimism reported in the article. At one point the article gives as one example of this optimism:

"Mr. Behravesh (the chief economist at IHS Global Insight) now expects the annual growth rate to rise to 2.9 percent in 2014 and 3.5 percent in 2015."

The trend rate of GDP growth is between 2.2-2.5 percent according to the Congressional Budget Office (CBO) and other forecasters. CBO puts the economy now at roughly 6.0 percent below its trend level of output. If we take the average of Behravesh's forecast for the next two years and assume that the economy sustains this rate going forward, then the economy will be growing at a rate of 3.2 percent.

At that pace it will be closing the output gap at a rate of between 0.7-1.0 percentage point a year. If we take the higher number (1.0 percentage point) then we will get back to potential output in 2019, making this downturn as long as the Great Depression. If we take the lower number then we won't get back to potential GDP sometime in 2021, making this a 14-year downturn.

It would be interesting to know what the real pessimists say.