February 16, 2008
CBO on the Outlook, Post-Stimulus
The CBO released new forecasts [pdf] yesterday. No recession, but...
CBO's previous forecast, which was embodied in budget projections released in January, was finalized in early December 2007. However, data released since then -- especially regarding the labor market -- indicate that economic conditions are weaker than previously projected, and conditions in some segments of financial markets remain worrisome. Other indicators -- such as production indices and information on retail sales and sales of new homes -- also 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 CBO's 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). CBO's projections are similar to the most recent Blue Chip consensus forecast, an average of the estimates of about 50 private-sector forecasters. Although CBO's 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.
The CBO forecast is compared against other forecasts in Table 3. Note that the White House forecast was finalized at the end of November, so the CBO and Blue Chip forecasts are not directly comparable. However, even back in December, the White House forecast was slightly more optimistic than the private sector consensus .
Table 3 from CBO, Update of CBO's Economic Forecast, February 15, 2008 [pdf].
For me, what is interesting (albeit not entirely surprising) is that despite the aggressive monetary easing and fiscal stimulus, the CBO outlook is less optimistic than the November Blue Chip (Table 1, CBO testimony), my proxy measure for CBO's short term outlook of early December.
Posted by Menzie Chinn at February 16, 2008 10:50 AMdigg this | reddit