The Economic Report of the President

On Monday Dr. Edward Lazear, Chairman of the President’s Council of Economic Advisers, released the Economic Report of the President for 2008.

This traditionally is released a week after the President’s Budget. It describes the state of the U.S. economy, and also discusses in more detail a range of economic policy issues. As the ERP is written by professional economists on the CEA staff, it’s quite substantive. Topics covered this year include the U.S. macroeconomic picture, credit and housing markets, export growth, health care, tax policy, the Nation’s infrastructure, alternative energy, and improving economic statistics.

In addition, Dr. Lazear spoke to reporters yesterday about the ERP, and about the Administration’s economic forecast. Here are some of the most significant quotes from that press briefing. While normally I try to explain our policies, I can’t do better than Eddie has done for himself, so I present his quotes without further ado.

On the economy

CHAIRMAN LAZEAR: Going forward, most forecasters expect the first half of 2008 to have slow, but positive, growth, followed by a pick-up in the latter half of the year. The stimulus package just passed by Congress that will be signed by the President shortly should help ensure against risks in the economy.

This year’s most significant economic events revolved around housing and credit markets. An apparent under-pricing of risk was revealed first in mortgage markets, and later in a variety of credit markets. The President was quick to respond to these issues by focusing on borrowers through programs like FHA Secure, suspension of the tax liability on mortgage write-downs, and HOPE NOW programs. Additionally, the Federal Reserve acted to pump liquidity into the market. Some credit markets have become more stable since the acute tightening that occurred in the summer.

Are we in a recession?

Q: [D]o you think we’re going to go into a recession or are in a recession right now?

CHAIRMAN LAZEAR: The answer is, I don’t think we are in a recession right now, and we are not forecasting a recession. We are forecasting slower growth. There’s no denying that the growth that we had in the fourth quarter of last year was significantly lower than the growth that we had in the third quarter. Now I just remind you that we had similar growth rates in the first quarter of last year, and those similar growth rates were followed by two very strong quarters. So these things are somewhat volatile.

I am not suggesting that we expect that in this quarter we’ll see the same kind of growth that we saw, say, in the third quarter of last year — we’ve had some issues, obviously, in terms of credit tightening, in terms of the housing markets. And that’s the reason why the President was very active in pushing through the stimulus package, which we’re very pleased about. I think we got that in record time. We think that’s insurance against risks on lower economic growth, and we think that will help a good bit. We think it should help immediately, because businesses will build those expectations into their plans, and we expect that will help the economy even in the very near term.

Should people be worried even if we’re not in a recession?

Q: I know you’re not forecasting a recession, but a lot of Americans look at the fourth quarter figures, they look at the stock market, they look at the shrinkage in the job figures in the fourth quarter, and they say, well, I’m worried about it. Are they wrong to be worried about it?

CHAIRMAN LAZEAR: Well, we look at those numbers too, and that was the motivation, of course, behind the stimulus package, because of the concerns out there — and it wasn’t just the public’s concerns, it was our concern that there are some factors that suggest some potential weakness in the economy. We were worried about lower growth, and as a result of that, we decided that it was the right time to act.

We believe that the stimulus package that was voted on last week will be quite effective in ensuring against these downside risks, and we think that they will keep the economy from slipping into lower levels of growth. And again I think that our forecasts are realistic, they’re consistent with what you’re seeing out on the street, as well. I think this is — we’re moving in the right direction.

I should also mention, by the way, that the Federal Reserve has also acted to change their monetary policy stature over the last few weeks, and in a pretty aggressive way, and that will also contribute, we think, to the economic picture.

Is the Administration willing to consider a second stimulus bill?

Q: Congress is planning to advance a second stimulus package in a few weeks. First of all, given the timing, would you even agree that it would be a stimulus package? And whether or not it has a stimulative effect, is the administration willing to consider additional measures?

CHAIRMAN LAZEAR: We think the proposal that we put out a few weeks ago, and it was acted on last week, is the right thing to do. We think 1 percent of GDP is about the right number — it’s slightly higher than 1 percent, but we think that’s an effective stimulus. We think it will have the desired effect. And that was the policy that we thought was appropriate. We still think that policy is appropriate and we’ll stick with that.

Does your forecast assume spillover from the housing problems into other financial markets or economic sectors?

Q: Back in March, the great debate was, will this housing crisis spill over into any other sector, and economists were divided, and of course by August we knew it was spilling into the financial sector. Now, if you pick up the papers you’re reading about corporate debt market seems to be under pressure. Is your forecast assuming no more spillover, or have you actually taken into effect possible spillover into corporate debt and other marketplaces?

CHAIRMAN LAZEAR: Well, when you say “spillover,” I guess I would say that’s still a debatable point. The fact that we saw some distress in other credit markets does not necessarily mean that it was a spillover from the housing market. It could have been, but it could also be a reflection of the same underlying phenomenon. I think most market observers believe that most of what we’ve seen in terms of credit markets reflects the under-pricing of risk that occurred over the past couple of years, that happen to have shown up first in mortgages.

Okay, so it showed up first in subprime. That doesn’t mean that subprime necessarily was the cause of what we saw in other markets. It’s just a reflection of the same forces perhaps showing up there first. And my guess is that will be something that will be debated by academics for the next 10 years to come.

Is it over? You know, who knows whether it’s over. I think the good thing that has happened in credit markets is that many firms have recognized their losses and, in addition to that, they’ve been able to raise capital. I think that’s the most encouraging sign — that firms have suffered some distress and financial markets, no question about it, but after they’ve declared those losses they’ve been able to go out and raise capital and to start again. And that’s what’s most important, I think, going forward.

By | 2017-05-23T18:37:27+00:00 Wednesday, 13 February 2008|