–US Unemployment Rate To Not Fall To Around 5% Until End Of 2014
WASHINGTON (MNI) – The following is the third and final part of the
statement by the U.S. Congressional Budget Office Thursday accompanying
it’s updated outlook for the U.S. budget and economy:
The Economic Outlook
The pace of growth after the recent recession is likely to be
slower than usual as the economy recovers from the effects of the
financial crisis and as the support to economic activity provided by
fiscal policy diminishes. In the past, many recoveries from deep
recessions have been quite robust. After deferring purchases during a
slump (especially for expensive goods like homes, automobiles, and
capital equipment), households and businesses typically boost their
spending quickly as economic prospects improve. However, international
experience suggests that recoveries from recessions that were spurred by
financial crises tend to be slower than average — perhaps because the
losses in wealth and damage to the financial system that occur during
such crises weigh on spending for a number of years. Following such a
crisis, it takes time for consumers to rebuild their wealth, for
financial institutions to restore their capital bases, and for
nonfinancial firms to regain the confidence required to invest in new
plant and equipment; all of those forces tend to restrain spending. In
addition, under current law, both the waning of fiscal stimulus and the
scheduled increases in taxes will temporarily subtract from growth,
especially in 2011.
In CBO’s projections, real GDP increases by 2.8 percent between the
fourth quarter of calendar year 2009 and the fourth quarter of 2010 and
by 2.0 percent in 2011. Such rates of growth are well below historical
norms for a recovery from a severe recession; for example, following the
deep recession of 1981 and 1982, real GDP surged by nearly 8 percent in
1983 and by roughly 6 percent in 1984. In CBO’s forecast, the growth of
real GDP picks up after 2011, averaging 4.1 percent annually from 2012
through 2014 and closing the gap between GDP and its potential level
(the amount of production that corresponds to a high use of labor and
capital) by the end of 2014.
The modest growth in output projected for the next few years points
to sluggish growth in employment during the remainder of this year and
next. Consequently, CBO projects that the unemployment rate will decline
slowly, falling to 9.3 percent at the end of 2010 and 8.8 percent at the
end of 2011. After that, the growth in employment will accelerate, and
the unemployment rate will decline more rapidly, reaching 5.1 percent at
the end of 2014.
Inflation in the prices of consumer goods and services (calculated
using the price index for personal consumption expenditures, or PCE) is
projected to be about 1 percent in 2010 and 2011, when measured on a
fourth-quarter-to-fourth-quarter basis. Core inflation, which excludes
the prices of food and energy, is also projected to be about 1 percent
this year and next. CBO projects that inflation will pick up moderately
thereafter but remain below 2.0 percent from 2012 through 2014.
Interest rates in CBO’s projections remain very low through the end
of 2011 and then rise gradually as the recovery continues. The Federal
Reserve is unlikely to raise its target for the federal funds rate (the
interest rate at which depository institutions lend reserves to each
other overnight) from its near-zero level while the recovery remains
subdued and inflation stays low. As a result, the interest rate on
3-month Treasury bills will average 0.2 percent in 2010 and 2011, CBO
projects. However, given CBO’s outlook that the economy will strengthen
and inflation will increase somewhat between 2012 and 2014, the
projected 3-month Treasury bill rate averages 2.8 percent in those
years. In the projections, the interest rate on 10-year Treasury notes,
which is influenced by investors’ expectations about monetary policy and
other factors, edges up from an average of 3.4 percent in 2010 to 3.5
percent in 2011 and then rises to an average of 4.7 percent over the
2012-2014 period.
Beyond 2014, CBO projects, growth in real GDP will match the growth
of potential GDP at 2.4 percent. In the agency’s projections, the
unemployment rate averages 5.0 percent from 2015 through 2020, and
inflation (as measured by the PCE price index) averages 2.0 percent.
During that period, the interest rates on 3-month Treasury bills and
10-year Treasury notes average 4.9 percent and 5.9 percent,
respectively.
Economic forecasts are always subject to considerable uncertainty.
The uncertainty regarding CBO’s current forecast is especially large,
both because forecasting the path of the economy near turning points in
the business cycle is always difficult and because the current business
cycle has been unusual in a variety of ways. Many developments could
lead to outcomes that differ substantially, in one direction or the
other, from those CBO has projected.
-end-
** Market News International Washington Bureau: 202-371-2121 **
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