Chapter
2
The current recession, which began in December 2007, took a sudden and severe turn for the worse late last year. Of the 4.4 million jobs lost since the recession began, more than half have been lost in just the past four months. According to the Congressional Budget Office’s economic projections, the economy will continue to deteriorate for some time, although the adoption of the American Recovery and Reinvestment Act and very aggressive actions by the Federal Reserve and the Treasury will help end the recession this fall.
In CBO’s forecast, on a fourth-quarter-to-fourth-quarter basis, real (inflation-adjusted) gross domestic product falls by 1.5 percent in 2009 before growing by 4.1 percent in both 2010 and 2011 (see Table 2-1). During the next two years, economic output averages about 7 percent below its potential—the output that would be produced if the economy’s resources were fully employed (see Figure 2-1). The shortfall in the nation’s output relative to its potential is comparable with what occurred during the recession of 1981 and 1982 and will persist for significantly longer—making the current recession the most severe since World War II. In the forecast, the unemployment rate rises further, peaking at 9.4 percent in late 2009 and early 2010, and remains above 7 percent through the end of 2011 (see Figure 2-2). The deterioration in 2009 and the protracted nature of the recovery reflect a number of factors: tight credit, a large number of vacant houses continuing to suppress housing construction, large losses in wealth restraining households’ spending, and weak economic growth overseas.
CBO’s Economic Projections for Calendar Years 2009 to 2019
| Estimated | Forecast |
Projected Annual Average |
|||||||||||||
| 2008a | 2009 | 2010 | 2011 | 2012-2015 | 2016-2019 | ||||||||||
| Year to Year (Percentage change) | |||||||||||||||
| Nominal GDP (Billions of dollars) | 14,257 | 14,047 | 14,576 | 15,233 | 18,138 | b | 21,164 | c | |||||||
| Nominal GDP | 3.3 | -1.5 | 3.8 | 4.5 | 4.5 | 3.9 | |||||||||
| Real GDP | 1.1 | -3.0 | 2.9 | 4.0 | 3.6 | 2.3 | |||||||||
| GDP Price Index | 2.2 | 1.5 | 0.8 | 0.5 | 0.9 | 1.6 | |||||||||
| PCE Price Indexd | 3.3 | -0.1 | 1.1 | 1.0 | 1.0 | 1.6 | |||||||||
| Core PCE Price Indexe | 2.0 | 1.0 | 0.8 | 0.7 | 0.9 | 1.6 | |||||||||
| Consumer Price Indexf | 3.8 | -0.7 | 1.4 | 1.2 | 1.2 | 1.9 | |||||||||
| Core Consumer Price Indexg | 2.3 | 1.5 | 1.1 | 0.9 | 1.1 | 1.9 | |||||||||
| Calendar Year Average (Percent) | |||||||||||||||
| Unemployment Rate | 5.8 | 8.8 | 9.0 | 7.7 | 5.6 | 4.8 | |||||||||
| Three-Month Treasury Bill Rate | 1.4 | 0.3 | 0.9 | 1.8 | 4.0 | 4.7 | |||||||||
| Ten-Year Treasury Note Rate | 3.7 | 2.9 | 3.4 | 4.0 | 5.1 | 5.6 | |||||||||
| Tax Bases (Billions of dollars) | |||||||||||||||
| Economic profits | 1,496 | 1,269 | 1,386 | 1,547 | 1,822 | b | 1,940 | c | |||||||
| Wages and salaries | 6,543 | 6,496 | 6,743 | 6,953 | 8,315 | b | 9,709 | c | |||||||
| Tax Bases (Percentage of GDP) | |||||||||||||||
| Economic profits | 10.5 | 9.0 | 9.5 | 10.2 | 10.4 | 9.5 | |||||||||
| Wages and salaries | 45.9 | 46.2 | 46.3 | 45.6 | 45.9 | 45.9 | |||||||||
| Fourth Quarter to Fourth Quarter (Percentage change) | |||||||||||||||
| Nominal GDP | 1.0 | -0.3 | 4.9 | 4.6 | 4.4 | 3.9 | |||||||||
| Real GDP | -0.9 | -1.5 | 4.1 | 4.1 | 3.4 | 2.3 | |||||||||
| GDP Price Index | 1.9 | 1.3 | 0.8 | 0.5 | 0.9 | 1.6 | |||||||||
| PCE Price Indexd | 1.7 | 0.5 | 1.0 | 0.9 | 1.1 | 1.6 | |||||||||
| Core PCE Price Indexe | 1.8 | 0.7 | 0.8 | 0.7 | 1.0 | 1.6 | |||||||||
| Consumer Price Indexf | 1.5 | 0.6 | 1.3 | 1.1 | 1.3 | 1.9 | |||||||||
| Core Consumer Price Indexg | 2.0 | 1.4 | 1.0 | 0.8 | 1.2 | 1.9 | |||||||||
Sources: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis; Department of Labor, Bureau of Labor Statistics; Federal Reserve Board.
Notes: GDP = gross domestic product; PCE = personal consumption expenditure.
Economic projections for each year from 2009 to 2019 appear in Appendix A.
d. The PCE chained price index.
e. The PCE chained price index excluding prices for food and energy.
f. The consumer price index for all urban consumers.
g. The consumer price index for all urban consumers excluding prices for food and energy.
Sources: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis.
Notes: The GDP gap is the difference between real (inflation-adjusted) gross domestic product and its estimated potential level (which corresponds to a high level of use of labor and capital resources).
Data are quarterly and are plotted through 2015.
Sources: Congressional Budget Office; Department of Labor, Bureau of Labor Statistics.
Notes: CBO’s estimate of the natural rate of unemployment is the rate of unemployment that is not due to the business cycle but to underlying characteristics of the labor market, such as normal rates of job turnover and the degree to which the job seekers’ skills and locations match available openings.
Although the rate of unemployment is projected to peak at a lower level than in 1982, the peak unemployment gap (the difference between the unemployment rate and the estimate of the natural rate of unemployment) is projected to be about the same as in 1982.
Data are quarterly and are plotted through 2015.
Inflation in consumer prices has been extremely low recently and, given the projection of persistently weak demand and excess productive capacity, it is expected to be low over the next few years as well. Overall price indexes have fallen since September 2008, primarily because of the sharp drop in energy and commodity prices, but also because “core” inflation (for items besides food and energy) slowed. CBO anticipates that core consumer price inflation, which averaged 2.3 percent during 2007 and 2008, will fall to 1.5 percent this year and 1.1 percent in 2010 and remain low through 2012.
Because of the likely persistence of the various factors holding down economic activity, CBO does not expect the output gap—the difference between actual and potential output of goods and services—to close fully until about 2014. In the latter part of the decade, CBO projects, GDP will grow at its potential (an average rate of 2.3 percent); the unemployment rate will average 4.8 percent; and core inflation for consumer prices, 1.9 percent.
CBO’s current forecast, particularly for the near term, is subject to a greater than normal degree of uncertainty. Figure 2-3, based on CBO’s past forecasting errors, illustrates the usual uncertainty regarding forecasts of real GDP. However, the figure probably understates uncertainty today. Both the magnitude of the contractionary forces operating in the economy and the magnitude of the government’s actions to stabilize the financial system and stimulate economic growth are outside the range of recent experience. The forecast assumes that financial markets will begin to function more normally and that the housing market will stabilize by early next year. The possibility that financial markets might not stabilize represents a major source of downside risk to the forecast. Households’ and businesses’ confidence is also difficult to predict. For example, if consumers begin to anticipate a period of deflation, they may choose to further postpone major discretionary purchases, thereby delaying the recovery; but evidence that economic conditions are stabilizing could encourage households and businesses to resume spending more rapidly than is envisioned in the forecast. Finally, although CBO’s forecast incorporates the middle of the range of the agency’s estimates of ARRA’s impact on GDP and employment, that range is quite large. For instance, CBO’s analysis suggests that by the fourth quarter of 2010, the stimulus legislation will raise real GDP by between 1.1 percent and 3.4 percent and increase employment by between 1.2 million and 3.6 million jobs.1
Uncertainty in Projections of Real GDP
Sources: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis.
Note: This figure, based on CBO’s past errors in forecasting real (inflation-adjusted) growth, shows a range of possible outcomes for real GDP. The projection described in this chapter falls in the middle of the darkest area of the figure. If the potential errors in the current forecast are similar to the errors in CBO’s forecasts published between 1976 and 2006, the probability is 90 percent that real GDP will fall in the shaded area of the graph. In the current circumstances, larger errors are more likely to occur than usual.
Economic conditions have deteriorated in the months since CBO prepared its last forecast, which was published in early January.2 Job losses have mounted, with the unemployment rate jumping to a 25-year high of 8.1 percent . Real GDP fell at a 6.2 percent annual rate in the fourth quarter and appears likely to have declined substantially further in the first quarter. Housing starts, industrial production, and orders and shipments of durable goods all declined sharply in late 2008 and early 2009, although consumer spending rebounded somewhat early this year from a very weak holiday season. Inflation is low, but the extremely low rates reported at the end of last year appear to have been largely transitory.
Even though house prices and housing starts continue to fall substantially, the inventory of unsold homes is still very high. Consequently, the prices of houses and the number of new homes being constructed are likely to be low for some time.
The Federal Housing Finance Authority’s national purchase-only house price index, which covers prices of houses purchased with conventional conforming mortgage loans (those eligible for purchase by Fannie Mae and Freddie Mac), declined by 3.4 percent in the fourth quarter, the largest one-quarter decline in that index’s history—leaving it about 10 percent off its early 2007 peak level. Also in the fourth quarter, the Standard & Poor’s (S&P) Case-Shiller national home price index, which covers all types of mortgage loans but is more geographically limited, was down by a larger amount, 18 percent from a year earlier and 27 percent from its early 2006 peak. Most analysts believe that the correction in house prices is far from complete; for example, according to the February Blue Chip consensus (which is the average of about 50 forecasts by private-sector economists), the 20-city version of the S&P Case-Shiller index will fall a further 14 percent in 2009.
Housing starts in January plunged to 477,000 (at a seasonally adjusted annual rate), an all-time low since the U.S. Census Bureau started tabulating them in 1959. Although they rebounded somewhat, to 583,000 in February, that number contrasts with the more than 2 million starts at the height of the boom in 2005. Even though the construction of new homes has been at an extremely low rate for more than a year, no progress has been made toward reducing the excess supply of vacant units. The number of vacant units per thousand households jumped from 143 at the end of 2005 to 170 at the end of 2008 (see Figure 2-4).
(Vacant homes per thousand households)
Sources: Congressional Budget Office; Department of Commerce, Bureau of the Census; Haver Analytics.
Notes: Total number of vacant housing units.
Data are quarterly and are plotted through 2008.
After rising for much of last year, mortgage rates—both for conforming loans and for larger, or jumbo, loans—fell late last year, and they have remained low thus far in 2009. Lower mortgage rates have spurred applications for refinancing; nevertheless, the number of applications for loans to finance purchases of homes has fallen this year.
Foreclosure rates continue to rise for all types of mortgages, especially for subprime adjustable-rate mortgages. Those rates are likely to remain high as long as house prices continue to fall and the unemployment rate climbs. A rising number of homeowners—13.6 million in the fourth quarter, according to an estimate by Moody’s Economy.com, compared with only 3.2 million at the end of 2006—have negative equity in their house (meaning that they currently owe more on their mortgage than the market value of their house).
Although conditions in the financial markets have improved from the acute turmoil in September and October of last year, they remain strained. Large-scale efforts by the Federal Reserve and the Treasury following the collapse of the investment bank Lehman Brothers and the rescue of insurance conglomerate American International Group (AIG) have brought down risk spreads (or differences in interest rates between risky and risk-free assets) from severely elevated levels. Those efforts also helped restore a considerable degree of activity to credit markets. However, many credit markets are not yet able to function normally without government assistance, and lending conditions remain tight, especially for financial firms.
Banks have tightened standards and terms for lending, although the pace of credit tightening may have eased a bit late last year. In the Federal Reserve’s most recent survey of senior loan officers, in January 2009, 90 percent of the domestic banks reported that they had increased spreads on commercial and industrial loans in the fourth quarter, and about 70 percent reported tighter lending standards.3 The percent age of banks reporting tighter standards on residential mortgages dropped sharply, perhaps reflecting efforts by the Federal Reserve and the Treasury to increase mortgage lending or less need to tighten standards further given previous tightening. For consumer loans, 60 percent of banks reported tighter lending standards, about the same as in the October survey.
In the fourth quarter of 2008, the commercial banking industry experienced its first aggregate loss since 1990, when many savings and loan institutions failed.4 For 2008 as a whole, earnings fell to $16 billion, compared with $100 billion in 2007. The proportion of real estate loans that were 30 days or more past due, at 6.2 percent in the fourth quarter of last year, had risen steadily from a year earlier, when it was 3.2 percent. The performance of other types of consumer loans and commercial and industrial loans also deteriorated. Overall, of the $7.9 trillion in loans and leases outstanding at the end of 2008, 5 percent were 30 days or more past due—including 3 percent that were 90 days or more past due, about double the amount in the fourth quarter of 2007.
Risk spreads remain elevated. They reflect a higher risk of default amid both the continuing difficulties of the financial system and a recession that is already deeper and longer than the past several downturns. One important risk spread is the difference between the interest rates banks pay to borrow from each other (which can be measured by the three-month Libor, or London interbank offered rate) and market expectations of the federal funds rate (which can be measured from an overnight index swap contract).
5 That indicator of the risk that banks will default on their loans was just over 1 percent age point in mid-March, well below its October 2008 peak of 3.6 percent age points but well above its normal level of 0.25 to 0.3 points and about where it was before the failure of Lehman Brothers in September 2008 (see Figure 2-5).
Spread Between the Three-Month Libor and the Expected Federal Funds Rate, January 2007 to March 2009
Sources: Congressional Budget Office; Bloomberg.
Notes: A spread is the difference between two interest rates. One, the three-month Libor (London interbank offered rate), is the interest rate major banks offer to other banks for loans of that duration. The other is the average federal funds rate expected over a three-month period as measured by the overnight index swap contract.
Data are weekly and are plotted through March 13, 2009.
Conditions have improved in the market for commercial paper (that is, short-term borrowing by firms), as indicated by a narrower spread relative to Treasury bills. Like the three-month Libor spread, commercial paper spreads have narrowed substantially from October 2008, but that narrowing has stalled since early January. The amount of outstanding commercial paper issued by nonfinancial firms has increased since the start of 2008, but the amount issued by financial firms has fallen by 20 percent over that period, implying that problems with access to credit in the corporate sector are for the most part confined to the financial sector. Although the Federal Reserve continues to provide extensive support to the market for commercial paper, the funding required for the central bank’s Commercial Paper Funding Facility has decreased steadily this year––a positive sign.6
The difference between interest rates on corporate bonds and Treasury securities remains wide, consistent with heightened concerns about credit markets and about the future course of the economy. Despite those concerns, the amount of corporate debt issued this year is well above that in the same period in 2008 for both investment-grade securities and high-yield debt.
An important credit channel, securitization, in which loans are pooled and converted into packages of securities, has yet to recover from its prolonged slump. The volume of new securities backed by auto loans, unpaid credit card balances, home equity loans, and student loans has plummeted from nearly $900 billion in 2007 to just $6 billion so far in 2009.
Diminished expectations of future profit growth because of the recession in the United States, the marked slowdown in economic activity in the rest of the world, and investors’ reduced appetite for risk have hurt prices of corporate stocks. Through March 18, the Wilshire 5000 index, the broadest U.S. equity measure, has declined by about 12 percent since the beginning of 2009 and is down 46 percent since the beginning of 2008. Financial companies and automakers have been the worst performers, with share prices down about 70 percent since the beginning of 2008. The decline in stock prices makes it more expensive for companies to raise equity capital for the purpose of investing in new plant and equipment (that is, structures, equipment, and software). And the reduction in households’ wealth attributable to falling equity and house prices has contributed to a decline in consumer spending.
Personal consumption spending slumped sharply during the second half of last year; in the fourth quarter, spending was slightly more than 1-1/2 percent below its level of a year earlier (see Figure 2-6). However, the latest data suggest a slight uptick in early 2009. Some of last year’s decline was in sales of light motor vehicles (automobiles and light trucks), which plunged from an average of about 17 million per year between 2000 and 2007 to an annual rate of just over 10 million in the fourth quarter of last year. But the decline in spending was broader, as spending on goods and services besides motor vehicles and parts fell by 1.4 percent in the second half of last year.
Real Personal Consumption Expenditures, January 1965 to January 2009
(Percentage change from previous year)
Sources: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis.
Note: Data are three-month moving averages of monthly data and are plotted through January 2009.
So far in 2009, sales of motor vehicles have fallen even further, to a 9.1 million annual rate in February. However, real personal consumption spending rose by 0.4 percent in January, and data on retail sales in February suggest another modest gain (and the likelihood that the January increase will be revised upward).
The weakness in consumer spending since mid-2008 (notwithstanding the slight rebound so far this year) reflects difficult conditions for consumers. Employment has fallen, households’ wealth has dropped markedly, credit conditions are quite tight, the income tax rebate under last year’s Emergency Economic Stabilization Act has run out, and consumer confidence has fallen to extremely low levels. But the sharp decline in the price of gasoline and other energy commodities since mid-2008 has boosted real disposable income, providing some support for consumer spending.
Over the past four months, the number of jobs has fallen by about 2.6 million (or nearly 2 percent), and aggregate income from wages and salaries fell 0.8 percent between October and January (or at an annual rate of 3.3 percent ). The labor market shows no sign of stabilizing; in February and early March, initial claims for unemployment insurance averaged well over 600,000 per week––roughly twice their average from 2005 to 2007 (see Figure 2-7).
Initial Claims for Unemployment Insurance, January 1965 to February 2009
Sources: Congressional Budget Office; Department of Labor, Employment and Training Administration, Unemployment Insurance Division.
Note: Data are monthly averages of weekly data and are plotted through February 2009.
The Trade Balance, 1965 to 2008
(Percentage of gross domestic product)
Sources: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis.
Note: Data are quarterly and are plotted through 2008.
The ongoing decline in house prices and the drop in stock prices reduced the net worth of households by 20 percent between the middle of 2007 and the fourth quarter of 2008. By CBO’s estimates, that decrease in wealth reduced the growth of spending by about 1 percent age point in 2008 and will have a similar effect in 2009. Weakness in the stock market and in house prices may further dampen consumer spending in 2009, with part of the effect extending into 2010.
The financial turmoil has also played a role in weakening households’ spending by reducing the credit available to consumers, especially for those with limited opportunity to borrow or little collateral. According to the Federal Reserve’s January 2009 survey of senior loan officers, banks had further tightened lending standards on credit cards and other consumer loans. A significant number of banks had also reduced the size of existing home equity lines of credit.
Business fixed investment (or spending by businesses on structures, equipment, and software), which had plateaued during the first three quarters of 2008, plunged at a 21 percent annual rate in the fourth quarter—a rate comparable to the worst declines observed in past postwar recessions. Shipments of nondefense capital goods and businesses’ purchases of light vehicles both fell sharply in January, pointing to another large drop in investment in producers’ durable equipment in the first quarter. Private nonresidential construction dropped significantly in January, and the American Institute of Architects’ billings index, a leading indicator of such construction, suggests more of the same through midyear.
After hitting an all-time low in June 2008, the ratio of inventories to sales in the manufacturing and the wholesale and retail trade sectors had, by the end of the year, jumped to its highest level since the last recession. The ratio of inventories to sales in manufacturing and in wholesale trade continued to rise in January. The need to realign inventories with sales is currently dampening production.
A rise in net exports contributed positively to real growth of GDP from the end of 2005 through most of 2008 (see Figure 2-8). However, the global recession and the sharp rise in the value of the dollar since last summer are together undercutting that source of strength. In the fourth quarter of last year, exports fell even more (in real terms, 24 percent at an annual rate) than did imports (16 percent).
The outlook for growth in the rest of the world has continued to deteriorate, suggesting that trade is not likely to contribute to growth in the United States in the near term (see Table 2-2). Economies that have relied heavily on exports for economic growth––including many emerging Asian economies, as well as Germany’s and Japan’s—have been particularly hard hit as the global downturn and credit squeeze have crushed demand for their exports. The situation is especially dire in Japan, Taiwan, South Korea, and Singapore, evidenced by the double-digit rate (annualized) at which real GDP contracted in those countries in the last quarter of 2008.
Consensus Forecasts of Foreign Economies’ Inflation-Adjusted Growth of GDP, 2009
(Percentage change from previous year)
| Survey of |
|||||||
| Region/Country | June 2008 | Sept. 2008 | Mar. 2009 | ||||
| Eurozone | 1.4 | 0.9 | -2.6 | ||||
| Germany | 1.3 | 0.8 | -3.2 | ||||
| United Kingdom | 1.3 | 0.6 | -3.0 | ||||
| Canada | 2.1 | 1.8 | -1.8 | ||||
| Asia Pacific | 4.8 | 4.6 | -0.2 | ||||
| Japan | 1.5 | 0.9 | -5.8 | ||||
| China | 9.4 | 9.1 | 7.0 | ||||
| India | 8.1 | 7.6 | 5.2 | ||||
| Latin America | 3.9 | 3.7 | -0.7 | ||||
| Brazil | 4.1 | 3.8 | -0.1 | ||||
| Mexico | 3.0 | 2.6 | -2.8 | ||||
Source: Congressional Budget Office based on data from Consensus Economics, Inc.
Note: GDP = gross domestic product.
Spending by State and Local Governments
State and local governments have reduced spending in response to shortfalls in their revenues, and CBO expects further cuts to slow economic activity over the next two years. Recent spending cuts have taken a variety of forms, including hiring and pay freezes, furloughs, layoffs, reductions in benefit programs, and decreases in purchases. States and localities have also tapped reserves and, in a few cases, increased taxes. Some states have increased borrowing, but in the aggregate, borrowing has been down, as unfavorable credit market conditions have made it more difficult to finance capital projects and to borrow for the sake of cash management in the short term.
Falling incomes, declining consumer spending, and continued decreases in house prices reduced all major sources of state and local revenue collections in 2008. In the fourth quarter, collections from personal income taxes fell by 0.4 percent (measured relative to those in the fourth quarter of 2007)––the first decline in more than five years. Corporate tax payments decreased by double digits over the year. Sales tax collections were also lower in the fourth quarter than a year earlier––the only such decline on record during the past half century. Although revenues from property taxes continued to grow, the rate of growth declined to 2.2 percent, contrasting with 5.4 percent a year earlier.
Although recent movements in consumer prices have been dominated by the fall in commodity prices—for both energy and food—consumer price inflation slowed in a number of other spending categories as well. The precipitous drop in petroleum prices from an average of $133 per barrel in July 2008 to $39 per barrel in February 2009 had a particularly large effect on overall inflation, as motor fuel prices fell sharply. A decline in prices for agricultural commodities also reduced consumer prices. The food-at-home index of the consumer price index for all urban consumers (CPI-U) eased down slightly from its November 2008 peak.
Inflation rates for consumer goods and services other than energy and food (core inflation) also slowed during the past few months (see Figure 2-9). Although the core CPI-U grew at an average 2.4 percent rate through the first three quarters of 2008, it rose at just a 0.6 percent rate in the fourth quarter. Some of the reduction is likely to be temporary, because declines in energy prices affected prices in some categories (especially the index for public transportation) and because vehicle prices fell sharply—factors that are not likely to be repeated on such a scale in 2009. Some of the disinflation is likely to be persistent, however, as a general easing in core inflation is typical during recessions. In addition, the large number of vacant housing units dampened the growth of rents in recent months, and that condition is likely to persist for some time.
Core Consumer Price Index, 1985 to 2011
(Percentage change at annual rates)
Sources: Congressional Budget Office; Department of Labor, Bureau of Labor Statistics.
Notes: The core consumer price index excludes energy and food.
Data are quarterly and are plotted through 2011.
In CBO’s forecast, the decline in output continues until the fall. But the rate of decline slows after the first quarter, in part because the effects of ARRA begin to take hold. Reduced tax-withholding rates and increased aid to low-income households in the form of expanded unemployment insurance and payments from the Supplemental Nutrition Assistance Program will support consumer spending in 2009, as will lower prices for energy. And the stimulus legislation will also contribute to growth via purchases of goods and services by the federal government and averted reductions in spending or increases in taxes that would have otherwise occurred at the state and local levels. However, CBO expects that high unemployment, tight credit conditions, and the declines in wealth will restrain the growth of consumption.
The forecast anticipates that business fixed investment will continue to decline in 2009, reflecting those tight lending conditions, much higher costs of funds (especially for equity), and weak demand for output that would be produced with new capital. Housing investment is also expected to continue declining this year. In addition, a continued drawdown of inventories and weakening foreign economies will restrain growth this year. By the end of 2009, the unemployment rate is projected to reach 9.4 percent, as employment declines by an additional 1-1/2 million jobs—for a total loss of nearly 6 million jobs since the recession started.
In the forecast, a recovery begins to take hold late in 2009 and quickens in 2010, as the drawdown of inventories ends, housing investment begins to recover, and business investment responds to the improvement in overall economic activity. And with labor markets no longer deteriorating, and the negative effects of the drop in wealth fading, consumer spending is expected to grow modestly. The unemployment rate declines to 8.5 percent by the end of 2010. In 2011, the projected output gap closes further, though GDP is still 4.3 percent below its potential by the end of that year, with the unemployment rate at 7.2 percent. (That recovery path assumes that policies aimed at stabilizing financial markets prove to be successful.)
With a large and sustained output gap, inflation is expected to be very low during the next several years. On a fourth-quarter-to-fourth-quarter basis, the core consumer price index is forecast to increase just 1.4 percent in 2009, 1.0 percent in 2010, and 0.8 percent in 2011 (see Figure 2-9). Because energy prices are lower in 2009 than they were last year, the overall consumer price index is expected to rise just 0.6 percent in 2009. Even as energy prices are forecast to stabilize, growth in the consumer price index is expected to remain low, at 1.3 percent in 2010 and 1.1 percent in 2011. In fact, some private-sector analysts are now concerned about deflation—prices falling for a broad range of goods and services for a protracted period. Although CBO’s forecast indicates a drop in the CPI-U between 2008 and 2009, that decline results from the fall in commodity prices—not in prices for a broad range of goods and services—and it is not persistent.
The rate for 3-month Treasury bills is expected to average only 0.3 percent in 2009; and for 10-year Treasury notes, 2.9 percent. Both of those rates are anticipated to rise in 2010 and 2011 but to remain well below their long-term averages. Although large federal budget deficits in CBO’s baseline projections would tend to boost interest rates, the weakness in economic activity and the very low inflation rate should hold down nominal interest rates for the next few years.
The American Recovery and Reinvestment Act’s Impact on the Near-Term Outlook
CBO’s forecast incorporates the estimated impact of the spending increases and tax reductions provided by ARRA. The major provisions of that law provide for direct purchases of goods and services by the federal government, transfers to state and local governments (both for infrastructure and for other purposes), payments to individuals, and temporary tax reductions for individuals and businesses. CBO believes that, without such stimulus, the economy probably would have continued to contract sharply throughout 2009. The unemployment rate probably would have exceeded 10.0 percent by the end of the year and peaked at around 10.5 percent in the first half of next year.
In projecting the impact of ARRA, CBO assessed the likely magnitude and timing of federal outlays and revenue reductions, developing a range of estimates of the effects on real GDP. The agency grouped the various provisions into a number of general categories, each of which was assumed to have a range of effects on the economy that could be summarized by “multipliers,” or the cumulative impact that a dollar in stimulus would have on output.7 For example, CBO determined that, with a multiplier of 1.0 to 2.5, a one-time increase in federal purchases of goods and services of $1.00 in the second quarter of this year would raise GDP by $1.00 to $2.50 in total over several quarters. The range of estimates for each category of stimulus is quite wide, reflecting a diversity of views among economists as to their effectiveness. CBO’s forecast is based on roughly the midpoint between the low and high estimated multipliers within each category.
Even after the fact, it will be quite difficult to assess the impact of ARRA on the economy. Uncertainty is great about both how the economy would perform in the absence of fiscal stimulus and the impact of stimulus. The best estimates of the impact of stimulus will come later, from studies carefully designed to isolate the effects of particular categories of stimulus from other influences on the economy.8
In CBO’s forecast, the enactment of ARRA boosts real GDP relative to that in a forecast of what would have happened in the absence of stimulus by about 2-1/2 percent in the fourth quarter of 2009 and by about 2-1/4 percent in the fourth quarter of 2010 (see Table 2-3). The unemployment rate is lower than it would otherwise be by about 0.9 percent age points in the fourth quarter of 2009 and 1.3 points in the fourth quarter of 2010. The boost to total employment peaks at about 2-1/2 million jobs in the second half of 2010.
Estimated Macroeconomic Impacts of the American Recovery and Reinvestment Act of 2009, Fourth Quarters of Calendar Years 2009 to 2019
| 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | ||
| Real GDP (Percentage change from baseline) | ||||||||||||
| Low estimate of effect | 1.4 | 1.1 | 0.4 | 0.1 | 0 | 0 | -0.1 | -0.2 | -0.2 | -0.2 | -0.2 | |
| High estimate of effect | 3.8 | 3.4 | 1.2 | 0.5 | 0.3 | 0.2 | 0.1 | 0 | 0 | 0 | 0 | |
| GDP Gapa (Percent) | ||||||||||||
| Baseline | -7.4 | -6.3 | -4.1 | -2.2 | -0.7 | -0.1 | 0 | 0 | 0 | 0 | 0 | |
| Low estimate of effect | -6.1 | -5.3 | -3.7 | -2.0 | -0.6 | -0.1 | 0 | 0 | 0 | 0 | 0 | |
| High estimate of effect | -3.9 | -3.2 | -2.9 | -1.7 | -0.5 | 0 | 0.1 | 0 | 0 | 0 | 0 | |
| Unemployment Rate (Percent) | ||||||||||||
| Baseline | 9.0 | 8.7 | 7.5 | 6.4 | 5.5 | 5.0 | 4.8 | 4.8 | 4.8 | 4.8 | 4.8 | |
| Low estimate of effect | 8.5 | 8.1 | 7.2 | 6.3 | 5.4 | 5.0 | 4.8 | 4.8 | 4.8 | 4.8 | 4.8 | |
| High estimate of effect | 7.8 | 6.8 | 6.6 | 6.0 | 5.3 | 4.9 | 4.8 | 4.8 | 4.8 | 4.8 | 4.8 | |
| Employment (Millions of jobs) | ||||||||||||
| Baseline | 141.6 | 143.3 | 146.2 | 149.3 | 152.1 | 153.9 | 154.9 | 155.7 | 156.4 | 157.0 | 157.7 | |
| Low estimate of effect | 142.4 | 144.5 | 146.8 | 149.6 | 152.2 | 153.9 | 155.0 | 155.7 | 156.4 | 157.0 | 157.7 | |
| High estimate of effect | 143.9 | 146.9 | 148.0 | 150.0 | 152.4 | 154.1 | 155.0 | 155.7 | 156.4 | 157.0 | 157.7 | |
Source: Congressional Budget Office.
a. Real GDP is gross domestic product, excluding the effects of inflation. The GDP gap is the percent age difference between gross domestic product and CBO’s estimate of potential GDP. Potential GDP is the estimated level of output that corresponds to a high level of use of labor and capital resources. A negative gap indicates a high unemployment rate and low utilization rates for plant and equipment.
Steps to Stabilize Financial Markets
CBO’s forecast assumes that the Federal Reserve and the Treasury, along with the Federal Deposit Insurance Corporation, will continue to act vigorously to address the problems in financial markets. Programs created by those entities have provided funds or issued guarantees in large amounts to financial institutions. Those programs have improved conditions in some financial markets and have reduced the risk of a collapse of the financial system. The forecast also assumes that the Federal Reserve will keep the federal funds rate close to zero and will continue to supply very large amounts of credit to financial markets until financial conditions and the availability of credit begin to return to normal. In addition, the forecast assumes that the central bank will act quickly to address any adverse developments that threaten liquidity or the stability of the financial system.
The Federal Reserve has announced that it will provide large amounts of additional funding to financial markets this year. After its March policy meeting, the Federal Reserve stated that it will purchase up to an additional $400 billion of securities for its portfolio—$300 billion in longer-term Treasury securities and $100 billion in debt issued by the government-owned corporations Fannie Mae and Freddie Mac. In addition to its more traditional way of purchasing government-related securities to expand its balance sheet, the Federal Reserve has created two new programs for that purpose. In the first program, designed in part to lower mortgage rates, the central bank will purchase up to $1.25 trillion of mortgage-backed securities (MBSs) issued by Fannie Mae, Freddie Mac, and Ginnie Mae. Through March 11, the Federal Reserve had purchased a net $217 billion of MBSs. The second program, called the Term Asset-Backed Security Loan Facility (TALF), is designed to increase the securitization of certain types of loans, including commercial mortgages, auto loans, and student loans. Under the TALF, the Federal Reserve will lend funds to private purchasers of top-rated securities backed by such loans for up to a three-year period using those securities as collateral; the total amount provided by the facility may be as much as $1 trillion.
The Treasury had bought about $107 billion of MBSs as of February 28, 2009, and it continues to purchase them. To support the TALF, the Treasury will allocate funds from the Troubled Asset Relief Program to offset the Federal Reserve’s potential losses in the event of default. In addition to the funds allocated so far for the TALF, roughly $250 billion remained uncommitted under the TARP as of mid-March and could be used to inject additional capital into banks or to support new programs.
The FDIC has also provided substantial assistance to financial institutions, which continue to issue new debt guaranteed by the FDIC under the Temporary Liquidity Guarantee Program. That program, which guarantees debt newly issued by banks and other financial institutions, was covering more than $250 billion of debt as of the end of January.
CBO expects that potential output will grow at an annual rate of 2.3 percent on average during the 2009–2019 period, or at roughly the same pace as the agency assumed in its January projections (see Table 2-4). The projections for labor input and productivity are essentially unchanged since January: The growth of potential hours worked averages 0.6 percent annually from 2009 to 2019, and the growth of total factor productivity averages 1.3 percent during the same period.9 The projected pace of capital accumulation, as measured by growth in the capital services index, is slightly slower, averaging 2.9 percent during the period, down from 3.0 percent in January. Once the economy returns to its potential level in 2014, CBO assumes that it will continue to produce goods and services at or near its potential rate of growth.
Key Assumptions in CBO’s Projection of Potential Output
| Average Annual Growth |
Projections
|
|||||||||||
| 1950- 1973 |
1974- 1981 |
1982- 1990 |
1991- 2001 |
2002- 2008 |
1950- 2008 |
2009- 2014 |
2015- 2019 |
2009- 2019 |
||||
| Overall Economy | ||||||||||||
| Potential Output | 3.9 | 3.2 | 3.2 | 2.9 | 2.8 | 3.4 | 2.2 | 2.4 | 2.3 | |||
| Potential Labor Force | 1.6 | 2.5 | 1.7 | 1.1 | 1.1 | 1.6 | 0.8 | 0.4 | 0.6 | |||
| Potential Labor | ||||||||||||
| Force Productivitya | 2.3 | 0.7 | 1.5 | 1.7 | 1.7 | 1.8 | 1.4 | 1.9 | 1.6 | |||
| Nonfarm Business Sector | ||||||||||||
| Potential Output | 4.0 | 3.5 | 3.4 | 3.3 | 3.1 | 3.6 | 2.5 | 2.8 | 2.6 | |||
| Potential Hours Worked | 1.4 | 2.2 | 1.7 | 1.1 | 0.9 | 1.4 | 0.7 | 0.5 | 0.6 | |||
| Capital Services | 3.8 | 4.3 | 4.2 | 4.7 | 2.6 | 3.9 | 2.1 | 3.8 | 2.9 | |||
| Potential TFP | 1.9 | 0.7 | 0.9 | 1.1 | 1.6 | 1.4 | 1.3 | 1.3 | 1.3 | |||
| Trend TFP | 1.9 | 0.7 | 1.0 | 1.0 | 1.2 | 1.3 | 1.2 | 1.2 | 1.2 | |||
| TFP adjustments | 0 | 0 | 0 | 0.1 | 0.5 | 0.1 | 0.2 | 0.2 | 0.2 | |||
| Price measurementb | 0 | 0 | 0 | 0.1 | 0.2 | 0 | 0.2 | 0.2 | 0.2 | |||
| Temporary adjustmentc | 0 | 0 | 0 | 0.1 | 0.3 | 0.1 | 0 | 0 | 0 | |||
| Contributions to theGrowth of Potential Output (Percentage points) | ||||||||||||
| Potential labor input | 1.0 | 1.6 | 1.2 | 0.8 | 0.7 | 1.0 | 0.5 | 0.3 | 0.4 | |||
| Capital services | 1.1 | 1.3 | 1.3 | 1.4 | 0.8 | 1.2 | 0.6 | 1.1 | 0.9 | |||
| Potential TFP | 1.9 | 0.7 | 0.9 | 1.1 | 1.6 | 1.4 | 1.3 | 1.3 | 1.3 | |||
| ___ | ___ | ___ | ___ | ___ | ___ | ___ | ___ | ___ | ||||
| Total Contributions | 4.0 | 3.5 | 3.4 | 3.3 | 3.1 | 3.6 | 2.5 | 2.8 | 2.6 | |||
| Memorandum: | ||||||||||||
| Potential Labor Productivityd | 2.6 | 1.3 | 1.7 | 2.2 | 2.2 | 2.2 | 1.8 | 2.3 | 2.0 | |||
Source: Congressional Budget Office.
Note: Total factor productivity (TFP) is average real output per unit of combined labor and capital services. The growth of TFP is defined as the growth of real output that is not explained by the growth of labor and capital.
a. The ratio of potential output to the potential labor force.
c. An adjustment for the unusually rapid growth of TFP between 2001 and 2003.
d. The estimated trend in the ratio of output to hours worked in the nonfarm business sector.
The primary difference between the current projections and the ones published in January is the effect of the American Recovery and Reinvestment Act of 2009. Although ARRA will boost output significantly in the next several years, any short-run effects of the stimulus legislation on the business cycle will have dissipated by the end of the projection period. In the latter part of the period, the legislation reduces projected output by roughly 0.1 percent, principally through its influence on capital accumulation.
Capital accumulation is affected because the increase in government debt is expected to displace, or “crowd out,” a smaller amount of private capital. That result occurs because the reduction in overall national saving dampens spending on business fixed investment and the construction of housing. Although the size of such displacement is very uncertain, CBO assumes that, in the long run, each dollar of additional federal debt crowds out about a third of a dollar’s worth of private domestic capital (with the remainder of the rise in debt offset by increases in private saving and inflows of foreign capital).
Other factors, however, are expected to partially offset the negative effect of the crowding out. Many of the legislation’s provisions, such as funding for improvements to roads and highways, might add to the economy’s potential output in much the same way that private capital investment does. Other provisions, such as funding for grants to increase access to college education or for research and development, could raise long-term productivity by enhancing people’s skills or speeding the pace of technical innovation. And still other provisions could create incentives for increased private investment. According to CBO’s estimates, provisions that could add to long-term output account for between a quarter and one-third of the legislation’s overall budgetary cost.
Comparison with CBO’s January Forecast
In addition to the effects of the American Recovery and Reinvestment Act, the other major change since CBO presented its forecast in January is in the underlying outlook for the economy in 2009: It has worsened considerably. The labor market has deteriorated far more than had been anticipated, and the decline in business fixed investment in the fourth quarter was more rapid than had been expected. CBO also now projects a much sharper drawdown of inventories over the next several quarters, as declining production suggests that firms desire leaner inventories than had been previously thought. News of further weakness in foreign economies has also dampened the outlook, as has the sharp decline in the stock market this year.
Since January, CBO has lowered its estimates of inflation for all of the projection period. The expectation of a deeper recession and slow recovery implies high unemployment rates and a great deal of excess capacity for many years. Those factors make it likely that the United States will experience very low inflation for a long time.
For 2010 through 2015, the current projections for the growth of the CPI-U and the price index for GDP are significantly lower than the ones in January (see Table 2-5). Inflation is also lower in the latter years of the projection period because CBO assumes the long spell of excess capacity will permit the Federal Reserve to achieve a slightly lower rate of inflation on average even when the economy returns to its potential.
CBO’s Current and Previous Economic Projections for Calendar Years 2009 to 2019
| Estimated | Forecast |
Projected Annual Average |
|||||||||||||
| 2008a | 2009 | 2010 | 2011 | 2012-2015 | 2016-2019 | ||||||||||
| Nominal GDP (Billions of dollars) | |||||||||||||||
| March 2009 | 14,257 | 14,047 | 14,576 | 15,233 | 18,138 | b | 21,164 | c | |||||||
| January 2009 | 14,304 | 14,241 | 14,591 | 15,347 | 19,077 | b | 22,500 | c | |||||||
| Nominal GDP (Percentage change) | |||||||||||||||
| March 2009 | 3.3 | -1.5 | 3.8 | 4.5 | 4.5 | 3.9 | |||||||||
| January 2009 | 3.6 | -0.4 | 2.5 | 5.2 | 5.6 | 4.2 | |||||||||
| Real GDP (Percentage change) | |||||||||||||||
| March 2009 | 1.1 | -3.0 | 2.9 | 4.0 | 3.6 | 2.3 | |||||||||
| January 2009 | 1.2 | -2.2 | 1.5 | 4.2 | 3.7 | 2.3 | |||||||||
| GDP Price Index (Percentage change) | |||||||||||||||
| March 2009 | 2.2 | 1.5 | 0.8 | 0.5 | 0.9 | 1.6 | |||||||||
| January 2009 | 2.4 | 1.8 | 0.9 | 1.0 | 1.8 | 1.9 | |||||||||
| Consumer Price Indexd (Percentage change) | |||||||||||||||
| March 2009 | 3.8 | -0.7 | 1.4 | 1.2 | 1.2 | 1.9 | |||||||||
| January 2009 | 4.1 | 0.1 | 1.7 | 1.8 | 2.2 | 2.2 | |||||||||
| Unemployment Rate (Percent) | |||||||||||||||
| March 2009 | 5.8 | 8.8 | 9.0 | 7.7 | 5.6 | 4.8 | |||||||||
| January 2009 | 5.7 | 8.3 | 9.0 | 8.0 | 5.7 | 4.8 | |||||||||
| Three-Month Treasury Bill Rate (Percent) | |||||||||||||||
| March 2009 | 1.4 | 0.3 | 0.9 | 1.8 | 4.0 | 4.7 | |||||||||
| January 2009 | 1.4 | 0.2 | 0.6 | 2.1 | 4.5 | 4.7 | |||||||||
| Ten-Year Treasury Note Rate (Percent) | |||||||||||||||
| March 2009 | 3.7 | 2.9 | 3.4 | 4.0 | 5.1 | 5.6 | |||||||||
| January 2009 | 3.7 | 3.0 | 3.2 | 3.6 | 5.2 | 5.4 | |||||||||
| Tax Bases (Billions of dollars) | |||||||||||||||
| Economic profits | |||||||||||||||
| March 2009 | 1,496 | 1,269 | 1,386 | 1,547 | 1,822 | b | 1,940 | c | |||||||
| January 2009 | 1,533 | 1,384 | 1,413 | 1,559 | 2,001 | b | 2,187 | c | |||||||
| Wages and salaries | |||||||||||||||
| March 2009 | 6,543 | 6,496 | 6,743 | 6,953 | 8,315 | b | 9,709 | c | |||||||
| January 2009 | 6,548 | 6,551 | 6,740 | 7,011 | 8,742 | b | 10,324 | c | |||||||
| Tax Bases (Percentage of GDP) | |||||||||||||||
| Economic profits | |||||||||||||||
| March 2009 | 10.5 | 9.0 | 9.5 | 10.2 | 10.4 | 9.5 | |||||||||
| January 2009 | 10.7 | 9.7 | 9.7 | 10.2 | 10.6 | 10.0 | |||||||||
| Wages and salaries | |||||||||||||||
| March 2009 | 45.9 | 46.2 | 46.3 | 45.6 | 45.9 | 45.9 | |||||||||
| January 2009 | 45.8 | 46.0 | 46.2 | 45.7 | 45.8 | 45.9 | |||||||||
| Memorandum: | |||||||||||||||
| Real Potential GDP (Percentage change) | |||||||||||||||
| March 2009 | 2.6 | 2.3 | 1.8 | 1.7 | 2.4 | 2.3 | |||||||||
| January 2009 | 2.6 | 2.4 | 2.0 | 1.9 | 2.4 | 2.3 | |||||||||
Sources: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis; Department of Labor, Bureau of Labor Statistics; Federal Reserve Board.
Note: GDP = gross domestic product; percent age changes are measured from one year to the next.
d. The consumer price index for all urban consumers.
Comparison with Other Forecasts
Comparing CBO’s forecast with others is complicated by the differences in the timing of forecasts given the rapid deterioration in economic conditions. CBO’s forecast reflects information available through early March, including data on employment and unemployment in February. In contrast, the Federal Reserve’s estimates were compiled in late January; the Administration’s forecast was completed in early February; and the Blue Chip consensus was compiled in early March, but prior to the release of the February data on labor markets.
CBO’s forecast has a deeper downturn in economic activity for this year than is indicated by most other forecasts, but it also has a somewhat faster rebound in 2010 and 2011. CBO’s projection for the change in real GDP in 2009 (-3.0 percent) is much weaker than the Administration’s (-1.2 percent) and slightly weaker than the Blue Chip consensus forecast (-2.6 percent) (see Table 2-6). On a fourth-quarter-to-fourth-quarter basis, CBO’s projection (-1.5 percent) is below the Federal Reserve’s central tendency (see Table 2-7). However, for 2010 and 2011, on average, CBO’s forecast for real growth of GDP is similar to the Administration’s and is stronger than the Blue Chip consensus forecast. CBO’s forecast is at the high end of the range of estimates by the Federal Reserve for 2010 but is within the central tendency for 2011.
Comparison of CBO, Administration, and Blue Chip Economic Projections for Calendar Years 2009 to 2019
| Estimated | Forecast |
Projected Annual Average |
|||||||||||||
| 2008a | 2009 | 2010 | 2011 | 2012-2015 | 2016-2019 | ||||||||||
| Nominal GDP (Billions of dollars) | |||||||||||||||
| CBO | 14,257 | 14,047 | 14,576 | 15,233 | 18,138 | b | 21,164 | c | |||||||
| Administration | 14,281 | 14,291 | 14,902 | 15,728 | 19,415 | b | 23,108 | c | |||||||
| Blue Chip | 14,265 | 14,065 | 14,515 | 15,255 | 18,667 | b | 22,603 | c | |||||||
| Nominal GDP (Percentage change) | |||||||||||||||
| CBO | 3.3 | -1.5 | 3.8 | 4.5 | 4.5 | 3.9 | |||||||||
| Administration | 3.4 | 0.1 | 4.3 | 5.5 | 5.4 | 4.4 | |||||||||
| Blue Chip | 3.3 | -1.4 | 3.2 | 5.1 | 5.2 | 4.9 | |||||||||
| Real GDP (Percentage change) | |||||||||||||||
| CBO | 1.1 | -3.0 | 2.9 | 4.0 | 3.6 | 2.3 | |||||||||
| Administration | 1.3 | -1.2 | 3.2 | 4.0 | 3.6 | 2.6 | |||||||||
| Blue Chip | 1.1 | -2.6 | 1.9 | 3.4 | 3.0 | 2.6 | |||||||||
| GDP Price Index (Percentage change) | |||||||||||||||
| CBO | 2.2 | 1.5 | 0.8 | 0.5 | 0.9 | 1.6 | |||||||||
| Administration | 2.2 | 1.2 | 1.1 | 1.5 | 1.8 | 1.8 | |||||||||
| Blue Chip | 2.2 | 1.2 | 1.2 | 1.7 | 2.2 | 2.3 | |||||||||
| Consumer Price Indexd (Percentage change) | |||||||||||||||
| CBO | 3.8 | -0.7 | 1.4 | 1.2 | 1.2 | 1.9 | |||||||||
| Administration | 3.8 | -0.6 | 1.6 | 1.8 | 2.1 | 2.1 | |||||||||
| Blue Chip | 3.8 | -0.8 | 1.6 | 2.1 | 2.4 | 2.5 | |||||||||
| Unemployment Rate (Percent) | |||||||||||||||
| CBO | 5.8 | 8.8 | 9.0 | 7.7 | 5.6 | 4.8 | |||||||||
| Administration | 5.8 | 8.1 | 7.9 | 7.1 | 5.3 | 5.0 | |||||||||
| Blue Chip | 5.8 | 8.6 | 9.1 | 8.1 | 6.3 | 5.5 | |||||||||
| Three-Month Treasury Bill Rate (Percent) | |||||||||||||||
| CBO | 1.4 | 0.3 | 0.9 | 1.8 | 4.0 | 4.7 | |||||||||
| Administration | 1.4 | 0.3 | 1.6 | 3.4 | 4.0 | 4.0 | |||||||||
| Blue Chip | 1.4 | 0.3 | 1.0 | 2.8 | 4.0 | 4.2 | |||||||||
| Ten-Year Treasury Note Rate (Percent) | |||||||||||||||
| CBO | 3.7 | 2.9 | 3.4 | 4.0 | 5.1 | 5.6 | |||||||||
| Administration | 3.7 | 2.8 | 4.0 | 4.8 | 5.2 | 5.2 | |||||||||
| Blue Chip | 3.7 | 2.9 | 3.7 | 4.5 | 5.2 | 5.4 | |||||||||
Sources: Congressional Budget Office; Office of Management and Budget; Department of Commerce, Bureau of Economic Analysis; Department of Labor, Bureau of Labor Statistics; Federal Reserve Board; and Aspen Publishers, Inc., Blue Chip Economic Indicators (March 10, 2009).
Note: GDP = gross domestic product; percent age changes are measured from one year to the next.
d. The consumer price index for all urban consumers.
Comparison of Economic Forecasts by the Federal Reserve and CBO for Calendar Years 2009, 2010, and 2011
| Federal Reserve |
||||
| Range | Central Tendency | CBO | ||
| 2009 | ||||
| Fourth Quarter to Fourth Quarter (Percentage change) | ||||
| Real GDP | -2.5 to 0.2 | -1.3 to -0.5 | -1.5 | |
| PCE Price Indexa | -0.5 to 1.5 | 0.3 to 1.0 | 0.5 | |
| Core PCE Price Indexb | 0.6 to 1.5 | 0.9 to 1.1 | 0.7 | |
| Average Level, Fourth Quarter (Percent) | ||||
| Civilian Unemployment Rate | 8.0 to 9.2 | 8.5 to 8.8 | 8.8 | |
| 2010 | ||||
| Fourth Quarter to Fourth Quarter (Percentage change) | ||||
| Real GDP | 1.5 to 4.5 | 2.5 to 3.3 | 4.1 | |
| PCE Price Indexa | 0.7 to 1.8 | 1.0 to 1.5 | 1.0 | |
| Core PCE Price Indexb | 0.4 to 1.7 | 0.8 to 1.5 | 0.8 | |
| Average Level, Fourth Quarter (Percent) | ||||
| Civilian Unemployment Rate | 7.0 to 9.2 | 8.0 to 8.3 | 9.0 | |
| 2011 | ||||
| Fourth Quarter to Fourth Quarter (Percentage change) | ||||
| Real GDP | 2.3 to 5.5 | 3.8 to 5.0 | 4.1 | |
| PCE Price Indexa | 0.2 to 2.1 | 0.9 to 1.7 | 0.9 | |
| Core PCE Price Indexb | 0 to 1.8 | 0.7 to 1.5 | 0.7 | |
| Average Level, Fourth Quarter (Percent) | ||||
| Civilian Unemployment Rate | 5.5 to 8.0 | 6.7 to 7.5 | 7.7 | |
Sources: Congressional Budget Office; Federal Reserve Board, “Summary of Economic Projections for the Meeting of January 27–28, 2009” (February 18, 2009).
Notes: GDP = gross domestic product; PCE = personal consumption expenditure.
The range of estimates from the Federal Reserve reflects all views of the members of the Federal Open Market Committee.
The central tendency reflects the most common views of the committee’s members.
a. The PCE chained price index.
b. The PCE chained price index excluding prices for food and energy.
CBO’s forecast for inflation in the near term is on the low end in comparison with the other forecasts. It is slightly lower than those of both the Administration and the Blue Chip consensus in 2009 and 2010 but substantially lower in 2011. CBO’s inflation forecast is within the Federal Reserve’s central tendency throughout the 2009–2011 period but at the low edge of that interval.
Reflecting the projections of low inflation and persistently high unemployment rates, interest rates for 2010 and 2011 in CBO’s forecast are also generally on the low side of the range of estimates by others. Compared with the Blue Chip consensus estimates, CBO’s forecasts of interest rates are identical in 2009, slightly lower on average in 2010, and significantly lower for 2011. (The Federal Reserve does not publish a forecast of interest rates.)
For the entire projection horizon, 2009 to 2019, CBO is estimating higher average growth than that implied by the Blue Chip consensus but lower growth than the estimate by the Administration. CBO projects that real GDP will be $15.3 trillion in 2019, for an average growth rate of 2.5 percent per year.10 The Blue Chip’s figure is $14.9 trillion, for an average annual growth rate of 2.3 percent; and the Administration’s, $15.8 trillion, for a rate of 2.8 percent.
There are smaller but still significant differences among forecasters for the average rates of unemployment, inflation, and interest rates for the latter years of the projection horizon. For 2016 to 2019, CBO expects about the same average unemployment rate as the Administration does but a lower rate than does the Blue Chip consensus. Similarly, CBO’s projection for inflation in those years is about the same as the Administration’s but lower than that of the Blue Chip consensus. Last, CBO’s projections of interest rates are somewhat higher.
For the years after 2011, the Federal Reserve provides some longer-run projections, including estimates of levels of real GDP growth and the unemployment rate that are sustainable in the long run and of the inflation rate that is consistent with the dual objectives of maximum employment and price stability given “appropriate monetary policy.” CBO’s projection of potential economic growth, at 2.6 percent five to six years from now, is within the Federal Reserve's central tendency of 2.5 percent to 2.7 percent for that time frame. CBO’s projection of the unemployment rate from 2016 to 2019, at 4.8 percent , is also within the Federal Reserve's central tendency of 4.8 percent to 5.0 percent. However, CBO’s projection of 1.6 percent inflation based on the price index for personal consumption expenditures is slightly below the Federal Reserve’s central tendency of 1.7 percent to 2.0 percent.
See Congressional Budget Office, “Estimated Macroeconomic Impacts of the American Recovery and Reinvestment Act of 2009,” letter to the Honorable Charles E. Grassley (March 2, 2009).
Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2009 to 2019 (January 2009).
Board of Governors of the Federal Reserve System, The January 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices (February 2009).
Federal Deposit Insurance Corporation, Quarterly Banking Profile (Fourth Quarter 2008).
In an overnight index swap, one party pays the other the daily effective federal funds rate for the life of the contract in exchange for receiving a fixed rate. Therefore, the fixed rate paid for a three-month overnight index swap contract provides a market estimate of the expected federal funds rate.
Board of Governors of the Federal Reserve System, Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks (statistical release H.4.1, various issues), available at www.federalreserve.gov/releases/h41/current/h41.htm.
For details, see Congressional Budget Office, “Estimated Macroeconomic Impacts of the American Recovery and Reinvestment Act of 2009.”
Examples of such studies include David Johnson, Jonathan Parker, and Nicholas S. Souleles, “Household Expenditure and the Income Tax Rebates of 2001,” American Economic Review, vol. 96, no. 5 (December 2006), pp. 1589–1610; and Christian Broda and Jonathan Parker, “The Impact of the 2008 Tax Rebates on Consumer Spending: A First Look at the Evidence,” Kellogg Insight (August 2008).
Total factor productivity is average real output per unit of combined labor and capital services. Its growth is defined as the growth of real output that is not explained by the growth of labor and capital.
Measured in 2000 chain-weighted dollars.
