Rosy Scenario II

The New York Times and various corporate economists also notice that Obama’s budget projections don’t sync well with the experts’ expectations:

2009 Budget -1.2 percent (-2.0)
2010 Budget +3.2 percent (+2.1)

A sense of disconnect between the projections by the White House and the grim realities of everyday American life was enhanced on Friday, as the Commerce Department gave a harsher assessment for the last three months of 2008. In place of an initial estimate that the economy contracted at an annualized rate of 3.8 percent — already abysmal — the government said that the pace of decline was actually 6.2 percent, making it the worst quarter since 1982.

In fairness to the White House, it appears my projections don’t sync well either, although mine are to the downside. First, I think it’s probable that the 6.2 percent contraction will be revised downward again when the BEA releases the Q4 Final report, since the agency all but announced that in the Preliminary report. Second, I anticipate that GDP contraction will not only be more severe than the -2.0 percent predicted by private economists, but it will be worse than the -3.3 percent being used for the worst-case “stress test” scenario. Third, I expect further contraction in 2010 in place of the growth that is unanimously projected, although it is entirely possible that inflation numbers will be fudged in order to conceal this contraction.

Note, however, that despite my general negativity I expect a considerable stock market rally to begin this spring, which should take the Dow back between 9k and 10k before it collapses again. Remember, nothing ever goes straight up or straight down. If you’ve been enjoying the ride down, it would probably be wise to take three-quarters of your chips off the table now and the rest if there’s another wave down to 6k in the next month.