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Saturday, March 21, 2009

Stress Test, Quarterly Forecasts for Unemployment and GDP

by Calculated Risk on 3/21/2009 01:59:00 PM

Earlier I posted the publicly released economic scenarios from the Supervisory Capital Assessment Program (bank stress tests).

The following graphs shows the stress test economic scenarios on a quarterly basis as provided by the regulators to the banks as part of the FAQs (no link). I've also added the most recent forecasts from Paul Kasriel at Northern Trust, and from Goldman Sachs (no link) for comparison.

The first graph is for the unemployment rate through 2010. This is a quarterly forecast - the January unemployment rate was 7.6% and February 8.1%.

Stress Test Unemployment Rate Click on graph for larger image in new window.

Although the two private forecasts don't include all of 2010, it appears that both the Kasriel and Goldman forecasts are near the "more adverse" scenario for 2009.

The second graph makes the same comparison for changes in real GDP.

Stress Test GDPAn interesting note: the stress test scenario is using the advanced GDP release estimate for Q4 2008 of -3.8%, as opposed to the revised estimate of -6.2%.

Once again the private forecasts are tracking much closer to the the more adverse scenario than the baseline scenario.

And please don't think Kasriel and Goldman are UberBears. From Paul Kasriel: Light at the End of the Tunnel or an Oncoming Freight Train?

With regard to the economy, we believe there are faint signs of light at the end of the tunnel. Real consumer spending increased by 0.4% in January (and is likely to be revised up) and the decline in February nominal retail sales of 0.1% suggests that the decline in real consumer spending that month will not be severe. For the first quarter as a whole, we now expect a contraction in consumer spending much less severe than last year’s fourth-quarter contraction of 4.3%. Although we do not expect to see outright growth in real consumer spending until the fourth quarter of this year, we believe the deepest quarterly contraction is behind us. With light motor vehicle sales idling just above 9 million units at an annual rate, it appears that for the first time since 1945 there are more used cars and trucks being scrapped than there are new ones getting out on the highways. At some point in the not-too-distant future, the purchases and production of cars and trucks will be stepped up.
These are the points I've been making and I also think there is a good chance (better than a coin flip) that GDP will turn slightly positive later this year. However I also think any recovery will be very sluggish.

Even with these "faint signs of light at the end of the tunnel", it appears the "more adverse" scenario is now the real baseline.