February 15, 2008
CBO released a new macroeconomic forecast today, in advance of a new set of budget baseline projections we will release in conjunction with our analysis of the President's budget. (We have occasionally issued these types of revisions before but they are relatively uncommon.) The revision is motivated by three recent developments: new data about the weakness of the economy, actions by the Federal Reserve, and the stimulus package passed by the Congress and signed into law by the President.
CBOs previous forecast, which was embodied in budget projections released in January, was finalized in early December 2007. Data released since thenespecially regarding the labor marketindicate that economic conditions are weaker than previously projected, and conditions in some segments of financial markets remain worrisome. Other indicatorssuch as production indices and information on retail sales and sales of new homesalso suggest a slowing in economic activity. At the same time, changes in monetary policy have been more substantial than CBO assumed in December, and fiscal policy stimulus has been enacted. The Federal Reserve reduced the target for the federal funds rate by 125 basis points in January, and financial markets anticipate further easing in the near future. In addition, the Economic Stimulus Act of 2008 will provide about $150 billion in tax rebates and business tax deductions in fiscal year 2008. CBO anticipates that the recent monetary and fiscal policy actions will provide significant support to the economy in 2008.The net effect of those developments since CBOs previous set of projections is slightly stronger projected economic activity for 2008 (because the impact of monetary and fiscal policy stimulus slightly outweighs the deterioration in economic conditions absent those policy changes) and slightly weaker projected economic activity for 2009 (in part because the withdrawal of fiscal stimulus temporarily reduces economic growth). CBOs projections are similar to the most recent Blue Chip consensus forecast, an average of the estimates of about 50 private-sector forecasters. Although CBOs projections do not show the slowdown in economic growth becoming severe enough to meet the economic definition of recession, the risk of a recession remains elevated, and economic activity will remain subdued for some period as the economy continues to work through the effects of problems in the housing and financial markets and the high price of oil. More specifically, CBO now forecasts that real GDP will grow by 1.9 percent in calendar year 2008 and 2.3 percent in 2009. The previous projections had been 1.7 percent and 2.8 percent respectively for 2008 and 2009.