Valid assumptions or old-fashioned bluff: Newsom’s economic forecasts


In summary

Are the Newsom administration’s dismal recession forecasts a reasonable outlier – or “grossly negative” and a “poker bluff” to increase the pressure for federal government financial aid?

Ten in ten economists agree: COVID-19 is absolutely ugly for the California economy.

Forecasters across the state analyzed the numbers and found that, at least over the next three months, overall economic activity will decline and the unemployment rate will remain at historic levels. No doctorate required to deduce why: Statewide shelter-in-place orders, coupled with reasonable fear of a deadly pathogen, have slowed the steady flow of transactions that make up the world’s fifth-largest economy.

But among the state’s prognosticators, no crystal ball has been darker than that of the governor.

Last week, Governor Gavin Newsom proposed a revised budget for the coming fiscal year that projects a huge gap between money coming in and money going out: $ 54 billion.

Financiers in the Newsom administration arrived at the 12-figure total in part on the basis of an equally dire vision for the state’s economic future. Unemployment in California will peak at nearly 25% before June, according to the state’s finance department. It will then remain above 20% for the remainder of the year and above the highest unemployment rate of the Great Recession until spring 2023, they say.

These are dark numbers. Much darker, in fact, than those projected by other notable economic forecasters in California.

Budget experts from outside the administration offered a mixture of explanations. Some have said Newsom’s economic forecast simply reflects the uncertainty inherent in trying to predict the future during an unprecedented global crisis.

Others called the governor’s projections “hard to understand,” “crude” or an overly pessimistic “poker bluff” aimed at garnering more support from the federal government.

“It’s just ridiculously negative… How can you say that out loud without laughing?” “

Chris Thornberg, Founder of Beacon Economics

Irena Asmundson, chief economist at the state’s finance department, noted that his projection assumes a rebound that will take about as long as that following the end of the Great Recession.

“We think we will be back to the pre-recession peak in about six years… although our decline is much larger,” she said. “So from that point of view, we’re actually extremely optimistic.”

The Legislative Analyst’s Office, the non-partisan agency that analyzes the budgets of state legislators, released its own projections: an economic rebound in “U” and a slower, more painful return to normal in “L”. This more dire projection causes the state’s unemployment rate to peak at 11.5% in 2020 – far better than Newsom’s assumed annual average of 18%.

Governor Gavin Newsom discusses his revised budget for 2020-2021 at a press conference in Sacramento on May 14, 2020. Photo by AP Rich Pedroncelli, AP Photo / Pool

The governor’s darker forecast puts a tighter constriction on the state budget, said Gabriel Petek, the state’s legislative analyst. For example, the administration is forecasting significantly higher spending for CalWORKS, the state’s cash welfare program, doubling the annual enrollment from its January forecast. Petek called such a dramatic increase “little confusing.” This planned increase in spending means less fiscal room for state legislators and a higher projected deficit.

But overall, Petek said Newsom’s darker economic forecast was “reasonable.” The administration’s estimate for total state tax revenue next year is pretty close to LAO’s guess. Given the deep uncertainty at the moment, a wide range of predictions should come as no surprise.

“We don’t think we know by any stretch of the imagination what’s going to happen,” added Ann Hollingshead, senior finance and policy analyst at LAO. “Unfortunately, the state has to pass a budget by June 15, so we’ll do our best.”

Economic forecasts are always based on a series of assumptions. Putting together Anderson’s forecast from UCLA on state economics director Jerry Nickelsburg said he assumed the worst of the pandemic was over. The forecast, which is expected to be released soon, will show the state’s unemployment rate to hit around 18% before “we start to come out of the depths” in the second half of the year, he said.

But during a recession sparked by a new viral outbreak, the assumptions built into the current batch of forecasts don’t even fit the wheelhouse of average economists, said Mark Schniepp, director of California Economic Forecast, a Santa Barbara consulting firm with and private sector clients

The slowdown “was not caused by a particular imbalance in the economy – it was done by a deliberate shutdown,” he said. “The rules for getting things back on track are going to be everywhere, and after that nobody knows how things are going to be. Even epidemiologists don’t know it and they are the experts, we are not the experts.

Despite this, Schniepp said he was skeptical of Newsom’s economic forecast of sluggish growth for years to come.

“It appears they assume the economy will essentially be shut down until a vaccine is developed or a cure is found,” he said. And he called it unrealistic.

This is not the case, Asmundson said. Instead, she said, it just takes time for the unemployed to find new jobs and for companies to decide that enough clients show up to start hiring again. The residual fear of the virus could slow down this process. “Given that this is a new disease (and) there is still so much unknown – how it is transmitted, whether people remain immune, whether or not we will have a vaccine, who is affected, what even symptoms, ”she said,“ I’m looking at this and think people are going to feel comfortable bouncing back in two or three years? And I just don’t know.

Chris Thornberg, founding partner of consultancy firm Beacon Economics, described the governor’s forecast more bluntly: “It’s just ridiculously negative… How can you say that out loud without laughing? “

While the most obvious comparison to the current pandemic-induced recession is the latest “once in a generation” economic crisis, the Great Recession, Thornberg said that was not the right benchmark. “The worst recessions are those that come after the collapse of a massive financial bubble,” he said. Collections can drag on for years as borrowers try to repay debts simultaneously, banks are slow to start lending again, and some sectors of the economy shrink to more sustainable levels over the long term.

“I wish I was wrong on my prediction.”

Irena Asmundson, Chief Economist, California Department of Finance

Thornberg said he did not foresee such long-term structural damage to the economy this time around.

“The vast majority of businesses that are now closed were perfectly fine and sustainable, and I expect the vast majority to reopen again,” he said.

Of course, just because Newsom’s economic forecast is the bleakest doesn’t necessarily mean it’s inaccurate. Contagion fears could keep shoppers away from stores for years. Lockdown orders could become a regular feature of California life.

“I would love to be wrong on my forecast,” said Asmundson of the Department of Finance.

But State Senator John Moorlach, a Republican from Costa Mesa and one of the state’s most vocal conservative critics on budget matters, said he believed the governor could paint a hyperbolically grim picture of the future to extract more help from the federal government. .

“Gavin has to do embarrassing things to try to get federal help, but I find these cheesy bluffs a little disturbing,” he said. “I think it’s brave but I think it’s cheesy.”

Announcing his revised budget last week, the governor said about $ 14 billion in cuts could be avoided if the federal government gave more money to the state.

Last week in Washington DC, the Democratic-controlled House passed another $ 3 trillion relief bill with about a third of the money going to cash-strapped cities and states. Jerome Powell, the Federal Reserve Chairman appointed by President Trump, also joined the call for more support from Congress, calling it “expensive but worth it if that helps prevent long-term economic damage, ”Sunday. Corn Republicans in GOP-controlled Senate divided find out if they will accept the proposal.

Newsom has stepped up political pressure. At CNN’s “State of the Union” On Sunday, the governor said that for states like California that “face unprecedented fiscal pressure, the onus is on the federal government to help.”

Today, the 91-member task force the governor assembled to help guide the state’s takeover sent a letter to bipartisan leaders in Congress.

“Without further help from the federal government, the very programs that will help people get their lives back on track and return to work – from child care to skills training to small business support – will all be forced. breathtaking, ”the letter said. bed.


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