Critics of President Donald Trump are complaining that the White House’s latest economic projects depend on a “rosy scenario” of the economy growing three percent or more.
The problem is that the basis for these complaints is the Federal Reserve’s economic forecasts, which have been far off base in recent years. The Fed’s projection was too high for 2016 and too low in both 2017 and 2018.
The Trump administration’s budget forecasts gross domestic product to 3.2 percent in 2019, 3.1 percent in 2020 and 3 percent in 2021.
The Federal Reserve, at its December interest rate policy meeting, forecast 2.3 percent this year, 2.0 percent next year, and 1.8 percent in 2021.
So who has a better track record? The Trump administration nailed 2018’s 3.1 percent GDP growth in its 2018 budget. The Federal Reserve at its December 2017 meeting forecast 2.5 percent growth for the following year–six-tenths of a percentage point too low.
The prior year, the Fed forecast 2.1 percent growth for 2017. The economy grew 2.5 percent. So the Fed was four-tenths of a percentage point too low.
Ahead of Donald Trump’s election, the Fed’s forecast missed in the other direction. In December of 2015, the Fed’s median forecast for the next year’s growth was 2.1 percent. In fact, the economy grew just 1.8 percent in the final year of Barack Obama’s presidency.
The Fed’s forecasts do not get more reliable when projected into the future. Back in December 2016, the Fed projected growth would fall to 2.0 percent in 2017 and 1.9 percent in 2020. Sound familiar? That’s right, it is almost the same forecast the Fed makes now. In other words, the Fed has been predicting that growth will fall to somewhere just under 2 percent over the next few years–and then pushing out the forecast ever further into the future as growth outperformed its forecast.
There’s a good reason for this. The Fed’s economic model predicts that the long run rate of growth for the economy is around 1.9 to 1.8 percent. So its forecasts consistently show that in the future the growth rate returns to that level.
But the forecast is not the economy. And economic reality has consistently outperformed the forecast. So there’s no rational basis for saying the Trump administration should revise its view of economic growth to match that of the Federal Reserve.