WASHINGTON (MNI) – The following is an excerpt from the Mid-Session
Review on the subject of economic assumptions, part of the update of the
federal budget proposals sent to Congress by the Obama administration
earlier this year, published Friday:

ECONOMIC ASSUMPTIONS

This Mid-Session Review (MSR) updates the economic forecast from
the 2011 Budget. The Budget forecast, completed last November and
released with the Budget in early February, projected that the increase
in output that began in the second half of 2009 would continue during
2010 and 2011 and that unemployment would fall gradually from its
elevated levels.

Output growth had just begun to appear in the economic data at the
time of the previous forecast, but it is now well established.
Industrial production, retail sales, and shipments and orders for
capital goods are all substantially higher than they were in the worst
months of 2009. There have been three consecutive quarters of positive
real GDP growth since 2009:Q2, and real GDP almost certainly continued
to increase in 2010:Q2.

While the economy has begun adding jobswith private sector
employment increasing in each of the past six monthslabor market
recovery is occurring only gradually. Unemployment has fallen 0.6
percentage points from its peak in October 2009, but remains above 9
percent. While the 147,000 jobs per month that have been added on
average over the past six months is a major improvement from the job
losses of 750,000 per month the economy was experiencing in early 2009,
it will take many months of job growth to offset the 8.4 million jobs
that were lost between December 2007 and December 2009.

Two policy initiatives are driving this resumption of economic
growth and job creation. The Recovery Act provides stimulus in the form
of tax reductions, support for State and local government budgets, and
increases in Federal spending, all serving to mitigate the severity of
the downturn. The Council of Economic Advisers estimates that the
Recovery Act has raised real GDP, as of the second quarter of 2010, by
between 2.7 and 3.2 percent and employment by between 2.5 and 3.6
million compared with what would have happened in the absence of the
recovery measures. These estimates are similar to those of the
Congressional Budget Office and other analysts. Also, aggressive actions
by the Federal Reserve and the Department of the Treasury have
stabilized financial markets while helping to unlock household and
business access to credit.

The economy has responded to these policy actions. Real GDP, for
instance, has expanded at an annual rate of 3.5 percent over the most
recent three quarters, and real consumer spending and business fixed
investment are both expanding again. So far in 2010, payroll employment
in the private sector has increased by 593,000 jobs. Total payroll
employment has increased more, but some of this represents hiring for
the 2010 Census, which has already begun to unwind. Another indicator of
labor market repair is the 2.9 percent annual rate of growth in hours
worked since December 2009. Business spending on equipment and software
has risen at a 10.4 percent annual rate since the second quarter of
2009, as businesses have responded to the improved sales outlook.
Moreover, sales of motor vehicles, after plunging in 2008 and 2009, are
up 21 percent from a low in February 2009and auto companies are making
profits once again.

Despite these positive developments, the U.S. economy still faces
strong headwinds. First, financial market uncertainty has hampered
credit creation since 2007. Spreads between private debt, such as
commercial paper, and Treasury securities have returned to pre-crisis
levels, but commercial banks and other private lenders have tightened
credit standards and many credit-worthy borrowers still have difficulty
finding credit. Still, after declining in every month since October
2008, commercial and industrial loans at the Nations banks increased in
June.

Second, although the housing market is showing signs of
stabilizing, there is a large overhang of unsold property, which is
holding back new construction. At current sales rates, the existing
supply of new homes would last for 8.5 months, well above the long-run
average supply. The median wait to sell a new home is 14.2 months, near
the all-time peak.

Third, most State governments face balanced budget requirements,
and the economic downturn has forced fiscal consolidations that have
reduced aggregate demand and slowed growth. The Recovery Act has helped
ease State fiscal adjustments, and the Administration has proposed
additional measures to help ease State budget shortfalls and prevent the
firing of employees such as teachers, firefighters, and police officers.
However, even with this fiscal support, further consolidation is likely.

Finally, several European countries have encountered difficulty in
recent months in obtaining credit, and financial markets around the
world have responded negatively to these developments. The European
Union has acted forcefully, however, to confront these issues,
establishing a $1 trillion financial rescue package that may be drawn
upon by threatened eurozone nations, and the affected governments have
acted to restrain their projected budget deficits. Even with these
actions, the European recovery is at risk because of increased
uncertainty while government stimulus is withdrawn, and a further
slowdown in Europe would pose problems for the rest of the world whose
exports to Europe may be reduced.

Despite these headwinds, the Administration expects economic growth
and job creation to continue for the rest of 2010 and to rise in 2011
and beyond. As the economy expands, the unemployment rate is expected to
fall gradually to more normal levels, but the collapse of the housing
bubble and the subsequent financial crisis have taken a significant toll
on the economy, and many of the after-effects are likely to be felt for
years to come.

Beyond 2016, the Administration’s forecast is based on the long-run
trends expected for real GDP growth, price inflation, and interest
rates. Projected real GDP growth in the long run is below the historical
average for the United States because of an expected slowdown in the
growth of the labor force as the population ages. Long-run economic
growth is expected to average 2.5 percent, which is unchanged from the
February Budget forecast.

ECONOMIC PROJECTIONS

The revised MSR economic projections are based on information
available through early June 2010. They are summarized in Table 2.

Real Gross Domestic Product (GDP) and the Unemployment Rate: Real
GDP is expected to rise by 3.1 percent during the four quarters of 2010
and to increase 4.0 percent in 2011. The growth rate is projected to
rise to 4.3 percent in 2012 and 4.2 percent in 2013 as the economy
returns closer to its potential output level. Beyond 2013, real GDP
growth is projected to moderate, declining gradually to 2.5 percent per
year in 2018-2020.

The unemployment rate is projected to average 9.7 percent in 2010.
This is the average level of unemployment that has prevailed during the
first six months of the year. Despite the growth in output, unemployment
is projected to decline slowly because, as labor market conditions
improve, discouraged workers rejoin the labor force, adding temporarily
to unemployment, while part-time workers increase their hours of work.
With continued healthy growth in 2011 and beyond, the unemployment rate
is projected to fall, but it is not projected to fall below 6.0 percent
until 2015. The increase in unemployment was unusually steep in this
cycle, exceeding what might have been expected based on the decline in
real GDP. Conceivably, the outsized rise in unemployment might be
followed by an equally rapid decline, but that is not assumed in these
projections. Rather, they reflect the close relationship that has
prevailed historically between changes in real GDP and unemployment.

Inflation: Inflation peaked in 2008 mainly because of a sharp rise
in world oil prices, and it has declined since then. Core inflation,
excluding food and energy prices, has also declined but much less
dramatically than the top-line measure. Core inflation was 2.4 percent
between June 2007 and June 2008; it was 1.7 percent over the following
12 months; and from June 2009 through June 2010 it was only 0.9 percent.
This is the lowest rate of core inflation since 1963. Core inflation is
expected to edge up in coming years as the economy recovers and
unemployment declines. In the long run, the CPI inflation rate is
projected to be 2.1 percent per year.

The other main measure of inflation is the price index for GDP.
Year-over-year inflation by this measure is projected to be 0.7 percent
in 2010, 1.0 percent in 2011, 1.5 percent in 2012, and ultimately 1.8
percent in 2016-2020.

** Market News International Washington Bureau: 202-371-2121 **

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