CBO released its ten year outlook today. Continued but decelerating growth, slightly less optimistic than Administration, noticeably less than the IMF, and FT-Booth survey.
Figure 1: GDP reported (bold black), CBO (tan), Administration (light blue square), IMF (pink), FT-Booth survey (red triangle), Survey of Professional Forecasters (green line), GDPNow of 1/17 (blue +), all in bn.Ch.2017$ SAAR. IMF, FT-Booth, GDPNow levels calculated by iterating growth rate on relevant lagged level. Source: BEA 2024Q3 3rd release, CBO Budget and Economic Outlook, January 2025, Economic Report of the President, 2025, IMF WEO January 2025, FT-Booth, Philadelphia Fed, Atlanta Fed, and author’s calculations.
The economy is projected by CBO to continue to grow (under current law), and the output gap to remain positive for quarters to come. As of 2024Q3, the output gap was 1.8% (log terms), using the most recent estimate of potential GDP (compared to 2.6% using the June 2024 vintage of potential GDP). The output gap will be 1% in 2024Q4 according to the Atlanta Fed’s nowcast of GDP.
Figure 2: GDP reported (bold black), CBO (tan), potential GDP estimate from CBO (gray),GDPNow of 1/17 (blue +), all in bn.Ch.2017$ SAAR. NBER defined peak-to-trough recession dates shaded gray. GDPNow levels calculated by iterating growth rate on relevant lagged level. Source: BEA 2024Q3 3rd release, CBO Budget and Economic Outlook, January 2025, Atlanta Fed, and author’s calculations.
By the current tally, output has been above potential for 14 quarter (not counting Q4, 2024). Assuming I’m counting right, the longest period of officially above-potential output was 23 quarters in the middle and late 1960s. That was in the golden age of U.S. growth, prior to the period of OPEC-induced inflation and the subsequent Great Moderation. The second longest such period of above-potential GDP was 14 quarters in the late 1990s and 2000. So we are already tied for the longest above-potential period during the Great Moderation, and CBO is forecasting at least 9 more quarters of above-potential output. Hmmmm…
The CBO never forecasts recession, and with good reason. Recession forecasting is a mug’s game, says Bill McBride, and Bill’s right. If you don’t forecast recession, then you have a hard time pulling above-potential GDP down to potential; recession has always been the way above-potential output has been brought down in the past:
https://fred.stlouisfed.org/graph/?g=1CZXQ
So, recession pretty soon, or not. If not, then this time is not like all the others, based on the current estimate of potential GDP. Realistically, we’d probably want to rejigger the estimate of potential GDP, since cruising along above potential for a long time calls “potential ” into question.
One reason for caring about potential at all is the assumption that above-potential output is inflationary – we need to know when the economy is headed for inflation. If above-potential output, by whatever definition, is not inflationary, someone should tell the Fed. So far in this cycle, the Fed hasn’t caused a recession. If above-potential output isn’t inflationary, maybe we can get away without one.