Here’s What the Congressional Budget Office Expects for 2013 and Beyond

Injured Piggy Bank WIth Crutches“Economic growth will remain slow this year,” begins a report from the Congressional Budget Office published this week. The top concerns illustrated by the report are the size of the nation’s deficit and debt, the rate of unemployment, and the federal policy that guides it all.

Government agencies tend to make forecasts based on what the laws on the books are, and not what the hope in the market is. The March 1 deadline for the sequester — $85 billion in spending cuts this fiscal year, with nearly $1.2 trillion scheduled over the coming years — looms ahead of market participants with the same menacing presence as the fiscal cliff. The reason, perhaps, is that these spending cuts are the half of the fiscal cliff that Congress couldn’t find the time to deal with before the New Year deadline, and decided to push them off for two months while they passed a tax bill.

Your 1 Feature Stock Pick for February is hot off the press. Click here to discover it now!

As it stands, the CBO projections on the size of the nation’s deficit and debt are based on the tax measures that were passed — higher taxes on the wealthy and the expiration of the payroll tax holiday, to name just two main provisions — as well as the sequester that is on the books. If congressional leaders manage to agree on a different set of spending cuts, then the CBO’s projections will need some editing…

“In CBO’s baseline projections, deficits continue to shrink over the next few years, falling to 2.4 percent of GDP by 2015. Deficits are projected to increase later in the coming decade, however, because of the pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt. As a result, federal debt held by the public is projected to remain historically high relative to the size of the economy for the next decade,” reads the report.

The sequester is particularly interesting because it is both a blessing and a curse for the economy. No one wants such severe austerity measures, but cutting spending is a sure-fire way to reduce the deficit. Similar painful but arguably effective measures have been pushed in places like Spain and Greece in an attempt to resolve their debt problems.

However, if the CBO is right about the increase in government costs that the future will bring, then even the sequester won’t be enough to get federal finances in order…

“Although economic growth is expected to remain slow again this year, CBO anticipates that underlying factors in the economy will spur a more rapid expansion beginning next year,” continues the report. The CBO argues that because of current fiscal policies (defense spending cuts, anyone?), real inflation-adjusted GDP was as much as 5.5 percent below its potential in the fourth-quarter of 2012, and will remain below potential through 2017.

“With such a large gap between actual and potential GDP persisting for so long, CBO projects that the total loss of output, relative to the economy’s potential, between 2007 and 2017 will be equivalent to nearly half of the output that the United States produced last year.”

The lost opportunity is sad, but hanging onto it won’t do anybody any good. Instead, let’s take a look at the rate of GDP growth the CBO expects for 2013 and beyond…

jobsThe CBO is expecting that, as the combined result of underlying economic improvement and fiscal tightening, real GDP will grow 1.4 percent in 2013. Unfortunately, this slow rate of growth will subdue hiring and business activity, and the U-3 unemployment rate is expected to remain near 8 percent throughout the year. Many projections are calling for a fall to about 7.5 percent by the beginning of 2014.

However, if fiscal tightening measures and federal policy maintain a modicum of competency, the CBO expects that real GDP will grow 3.4 percent in 2014, and an average of 3.6 percent a year from 2015 to 2018. As the housing and financial crises fade, equities will strengthen on the back of improved corporate earnings. What’s more, home prices have already showed some positive signs of recovery, and the housing market is expected to continue improving.

But once again the downside is the unemployment rate. The CBO expects 7.5 percent unemployment through 2014, and a gradual decline to 5.5 by the end of 2017. This comes with estimates that the annual increase in the price index for personal consumption expenditures will reach 2 percent by 2015. In line with this sort of movement, the yield on the 10-year T-bill is expected to hit 5.2 percent in 2017.

Don’t Miss: Is Interest Rate Manipulation Everywhere?