Economist Dean Baker: Wall Street Is Too Optimistic

Wednesday, 10 Apr 2013 08:06 AM

By Michael Kling

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Wall Street is far too optimistic about prospects for an economic recovery, cautions Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C.

Look for the unemployment rate to remain essentially unchanged this year, he notes.

Baker correctly predicted a weak jobs report for March. Economists on average expected about 220,000 new jobs, according to Fortune. Instead, there were just 88,000.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

Writing on his blog, Baker said economists should have known better.

“It was easy to see that the economy was not growing rapidly long before Friday’s jobs reports,” he says. “The economy grew at just a 0.4 percent annual rate in the fourth quarter.”

Although that weakness was largely due to unusual factors, the economy only grew at a 1.7 percent rate in the second half of 2012.

“It’s not clear what someone would have had to have been smoking to expect a marked upturn from this pace,” he writes. “Did they think the ending of the payroll tax cut would spur growth? Did the fact that new orders for capital goods (excluding aircraft) in February of 2013 were virtually unchanged from February of 2012 lead them to expect an investment boom?”

Or maybe, he asks sarcastically, they based their prediction on the fact that job growth from October to February averaged just 40,000 less than in the period a year ago.

Baker predicts job growth of about 100,000 a month this year, not enough to decrease unemployment, Fortune reports. In fact, we’re more likely to see unemployment increase than fall over the rest of the year.

The end of the payroll tax holiday will take over $100 billion from consumers this year, he wrote in an article for Politix. The sequester will cut federal payrolls and payments by about $80 billion.

“Together these policies are likely to slow growth by more than a percentage point,” he says.

Optimists point out that housing construction is up. That is true, he concedes. But residential construction is just 2 percent of gross domestic product (GDP). Even if it grew by 20 percent, it would still add only 0.4 percent percentage point to GDP growth.

“Sequestration is going to have an adverse effect on the economy,” Alan Krueger, chairman of the White House Council of Economic Advisers, told Bloomberg Television. “That’s one of the headwinds we’re facing.”

The Congressional Budget Office estimates that sequestration will reduce employment by 750,000 by the end of the year.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

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