With a national election less than a year away, this is a sensitive time to be the president's chief economist.
The revised forecast released Thursday by Edward Lazear, chairman of the President's Council of Economic Advisors, predicts the US economy will continue to move forward in 2008. But the Bush economic team has lowered its expectations for economic growth next year and boosted its predictions for unemployment. Softening growth and rising unemployment do not tend to put voters in a cheery mood.
The administration is predicting that inflation-adjusted gross domestic product will grow 2.7 percent in 2008, down from an earlier estimate of 3.1 percent. The unemployment rate is predicted to climb to 4.9 percent in 2008, up from a historically low 4.6 percent rate this year. The housing market's woes played a key role in triggering both changes, Mr. Lazear said.
The administration forecast is somewhat more optimistic than the 1.8 to 2.5 percent growth range Federal Reserve policymakers are predicting for 2008. And it is far more bullish than the view expressed earlier this week by former Treasury Secretary Lawrence Summers. In a Financial Times essay, Mr. Summers wrote, "The odds now favor a US recession that slows growth significantly on a global basis."
Lazear was asked about Summers's remarks at a Monitor-sponsored breakfast with reporters held Thursday morning. "We view the prospects for lower growth as certainly being one that we take as significant. There is no question that there are signs in the economy right now that things are solid," he said. "There are a number of very positive indicators, but there are some uncertainties. There is no denying that."
In a conference call with reporters later Thursday morning, Lazear cautioned that forecasting is "a pretty inexact science."
Lazear brings a stellar résumé to the inexact science. After earning bachelor's and master's degrees in economics at the University of California, Los Angeles, he went east to earn a doctorate at Harvard University in Cambridge, Mass. Lazear is on leave from the faculty of Stanford University's Graduate School of Business in California, where he has taught since 1992. Prior to that, he was on the faculty of the University of Chicago's Graduate School of Business. He has written or edited nine books and 100 scholarly articles.
The Bush administration soon may announce additional steps to deal with the troubled housing market, Lazear hinted. "We will probably hear more detail about this next week possibly from [Treasury Secretary] Hank Paulson or [Housing and Urban Development Secretary] Alphonso Jackson," he said. But the president's top economist also cautioned, "Some loans were made that should not have been made. And no matter what you do, you simply can not do workouts in situations where a borrower cannot afford to live in the house in which he happens to be located."
The White House adviser was restrained in discussing a front-page report in Thursday's New York Times that credit flowing to American companies was drying up at a rate not seen since data began being kept in 1973. The cutoff in credit is seen as an outgrowth of the problems facing the housing and mortgage industries.
"We are watching credit markets closely. There has been recent tightening again in credit markets that is certainly worth noting," Lazear said. "So far the real economy has remained quite strong – in particular, the labor market has remained strong and has been able to deal with these shocks to the credit market. We hope that will continue. Our expectations are that it will continue and that we will be able to retain our resiliency but obviously this is something we keep our eye on and we don't get complacent."
Lazear's strongest language was saved for the harm that protectionism could do to the economy. "There does seem to me to be an uptick in protectionist sentiment," he said. "I do think that the protectionist sentiment that we do see is one we have to be very cautious about because it is the one thing I would think could quickly derail our economy. If we stop the flow of funds from abroad, if we stopped our ability to attract capital, this could be quite problematic."