Where the Stress Falls

As recently as a few months ago, federal policy makersfailed to anticipate the full extent of the downturn. Withimplications for commercial real estate portfolios, the impact ismanifest in state budgets. In preparing the federal budgetproposal for the upcoming fiscal year, the White House and theOffice of Management and Budget (OMB) made a number of assumptionsregarding the economy's direction. In almost every respect, thoseassumptions have been proven to be overly optimistic. Amongst theforecasts that illustrate the divergence between the OMB'sprojections and outcomes to-date, the White House budget proposalanticipated 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. RealEstate Econometrics' own projection for end-of-year unemployment is10.4 percent. We also anticipate a slower recovery than is impliedby the OMB's 7.9 percent unemployment rate for 2010. The OMB wasnot alone in underestimating the extent of contraction in the labormarket. The Blue Chip consensus for 2009 unemployment was 8.3percent in February. Similarly, May's stress tests employeddownside scenarios for the economy that seem benign - if not na