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 [1].


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.

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