Two days before the much-anticipated economic summit meeting in Jackson Hole, Wyo., the Congressional Budget Office released Wednesday its summer budget and economic outlook for the United States. The projections are not reassuring.
The CBO projects a $1.3 trillion deficit for 2011, or 8.5% of U.S. GDP, which it notes would be the third-largest deficit over the past 65 years. The larger deficits were posted in 2010 and 2009. As for GDP, the CBO analysis–using economic data through early July—projects that the economic recovery will continue, but only at a 2.3% pace in 2011 and 2.7% in 2012.
Using current law as a guideline, the report projects that because “federal tax and spending policies will impose substantial restraint on the economy in 2013,” it expects GDP of only 1.5% that year (year-over-year from Q4 2012), though it expects the economy to improve at an average rate of 3.6% from 2013 to 2016.
The CBO’s numbers for GDP are significantly lower than the Federal Reserve’s projected range of growth of 2.5%-3% in 2011, 2.2%-4.0% in 2012, and 3.0%-4.5% in 2013. Market watchers and economists—and advisors—are waiting to see what messages Fed Chairman Ben Bernanke will give at the Jackson Hole economic summit, sponsored yearly by the Kansas City Fed.
There is speculation that the Fed may take steps to stimulate more growth in the economy, perhaps in the form of another round of quantitative easing. On Aug. 9, the FOMC announced that it would keep the Federal funds rate at its current level “at least through mid-2013,” citing the prevailing economic conditions that include “low rates of resource utilization and a subdued outlook for inflation over the medium run.”
Aspen Partners’ CIO and AdvisorOne blogger Ben Warwick was one of those observers who saw Bernanke’s “open-ended verbiage” two weeks ago as eerily reminiscent of the Fed chairman’s words prior to the last round of QE.
In his blog on the study, CBO Director Douglas Olmendorf begins with the understatement that the country “continues to face profound budgetary and economic challenges.” He also points out that while CBO’s analysis was completed in July and updated in August to reflect policy changes from the Budget Control Act, the summer update does not include the recent volatility in the financial markets and “weakness in certain economic indicators.” Doing so, Elmendorf writes, “would have led CBO to temper its near-term forecast for economic growth.”
The CBO’s analysis does contain a silver lining or two, though some might see it as wishful thinking.
It expects the unemployment rate to fall from 9.1% in the second quarter of 2011 to 8.9% in the fourth quarter of the year, then to 8.5% by Q4 2012 and to 5.3% by 2016. As for inflation, it projects that it will diminish in the second half of this year and stay below 2% through the next five years.
But what of that pesky deficit? CBO says assuming that the recovery continues to unfold as it expects, and that “tax and spending policies unfold as specified in current law, deficits will drop markedly as a share of GDP over the next few years,” from 6.2% of GDP by Q4 2012, to 3.2% of GDP in 2013, and will average 1.2% from 2014 to 2021.