Where the Stress Falls

As recently as a few months ago, federal policy makers failed to anticipate the full extent of the downturn. With implications for commercial real estate portfolios, the impact is manifest in state budgets. In preparing the federal budget proposal for the upcoming fiscal year, the White House and the Office of Management and Budget (OMB) made a number of assumptions regarding the economy's direction. In almost every respect, those assumptions have been proven to be overly optimistic. Amongst the forecasts that illustrate the divergence between the OMB's projections and outcomes to-date, the White House budget proposal anticipated an unemployment rate of 8.1 percent in 2009. As of May, the national unemployment rate had already climbed to 9.4 percent, 130 basis points above the OMB's expectation for the year. Real Estate Econometrics' own projection for end-of-year unemployment is 10.4 percent. We also anticipate a slower recovery than is implied by the OMB's 7.9 percent unemployment rate for 2010. The OMB was not alone in underestimating the extent of contraction in the labor market. The Blue Chip consensus for 2009 unemployment was 8.3 percent in February.  Similarly, May's stress tests employed downside scenarios for the economy that seem benign - if not na