CBO’s Forecast for 2008 and 2009

Greg Mankiw provides a link to CBO’s latest (February) forecast for 2008 and 2009, which updated a forecast from the previous month. CBO writes:

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.

Table 2 shows that CBO expects 1.7% real GDP growth for 2008 and 2.3% growth for 2009 with unemployment rising to 5.5%. If I’m reading this right, the fiscal stimulus is indeed going to be temporary as planned but the amount of aggregate demand stimulus will not be enough to avoid a rise in unemployment over the next couple of years. This sounds to me to confirm a lot of what Paul Krugman has been saying of late.