Is the Stimulus Working?

Has the $787 billion stimulus package worked? In California last Wednesday, President Obama declared, “we are already seeing results.” That is in line with the predictions Obama and his advisers made when they warned of dire consequences if the stimulus did not pass.

“If we fail to act, we are likely to lose millions more jobs and the unemployment rate could reach double digits,” Christina Romer, Obama’s chairwoman of the President’s Council of Economic Advisers, warned on February 4.

Obama agreed. “If we do not act, a bad situation will become dramatically worse. Crisis could turn into catastrophe for families and businesses across the country,” he said.

The administration was also very clear about the expected benefits from the legislation. On Jan. 25, Larry Summers, Obama’s chief economic adviser, said that the economy would start improving “within weeks” of the stimulus plan being passed.

The administration made specific predictions about the impact the bill would have. For instance, on Feb. 28, 11 days after the stimulus bill passed, the Obama administration predicted that the national unemployment rate was going to average 8.1 percent this year and then decline to an average of 7.9 percent next year. It also predicted that GDP was going to decline by only 1.2 percent this year.

Such predictions were less pessimistic than those of most economists. While the administration was expecting an average annual unemployment rate of 8.1 percent for the year, business economists and forecasters surveyed in January by the Wall Street Journal expected the June unemployment rate to be 8.2 percent and the December rate to be at 8.6 percent.

How did the predictions stack up? While the unemployment rate was at 8.1 percent in February, it had risen to 8.9 percent by April. By May 11, Christine Romer was calling 9.5 percent unemployment by the end of the year “pretty realistic.” Business economists and forecasters surveyed by The Wall Street Journal had increased their estimates to 9.7 percent. Thus, what Romer was predicting would be the worst-case scenario if the stimulus was not quickly enacted is occurring with the stimulus plan in place.

Cary Leahey, an economist and senior managing director with Decision Economics, one of the forecasters surveyed by the Wall Street Journal, told Fox News: “With transitional moves in government spending [from the stimulus], there will be dislocations in the economy that will lead to higher unemployment.” But he emphasized that he thought those effects would be “short-lived, six to nine months, definitely not more than a year.”

Other forecasters see the administration’s claims as the type of exaggerations that could come from any administration. Nicholas Perna, president of Perna Associates and a lecturer at Yale University, a supporter of the stimulus, argued that it was really too early to see improvements from the stimulus in terms of unemployment or GDP and that the initial administration claims involved “political considerations” on how to sell the package. He added that “overall the economy is still clearly declining.”

Economists have consistently been expecting the economy to begin showing positive growth in the second half of this year. But the stimulus appears to have dampened the recovery that economists were expecting.

Take the expected growth in the third quarter (from July to September) this year. In January, the forecasters surveyed by the Wall Street Journal were expecting GDP during that period to rise by 1.2 percent at an annual rate. By May, the expected growth had been cut in half to 0.6 percent. The pattern is similar for both the second and fourth quarters this year. Paul Evans, the editor of the Journal of Money, Credit, and Banking and an economics professor at Ohio State University, agrees with this and tells FOX News: “Most likely the economic recovery would have been more rapid at this point without [the stimulus package].”

Other forecasts have shown a similar pattern. By the end of last week, the U.S. manufacturing output is now expected to plummet by 12 percent this year. In February, the drop was expected to be 8 percent. The decline in the housing market failed to slow down after the stimulus package. The mortgage delinquency and foreclosure rates in the U.S. just experienced their biggest quarterly increases since records started in 1972. Both numbers are also at their highest recorded levels. The S&P/Case-Shiller U.S. National Home Price Index posted a 19.1% drop from a year earlier, the biggest single quarterly decline for the reading’s 21-year history. In January, forecasters expected about 770,000 new homes being built this year. By May, only 580,000 new homes were expected for 2009.

Over the same four months, economists have also become more pessimistic about housing starts next year: The number of expected new housing starts for next year declined from 980,000 to 820,000. Again, what recovery was originally expected later this year and next year has actually declined after the stimulus.

The Obama administration still says that things are better now because of the stimulus bill. “It’s safe to say we have stepped back from the brink,” Obama said at a fundraiser last Wednesday evening.

The Obama administration did not respond to questions about their predictions about the stimulus’ impact on the economy.

*John Lott is the author of Freedomnomics and a senior research scientist at the University of Maryland.