Source: US Congressional Budget Office
On Wednesday, the Congressional Budget Office released An Update to the Budget and Economic Outlook: 2019 to 2029. The report contains CBO’s latest economic forecast, which reflects recent economic developments and incorporates changes in federal fiscal and trade policies.
If current laws governing federal taxes and spending generally remained in place, the economy would expand by 2.3 percent this year and then grow at an average annual rate of 1.8 percent over the next decade, CBO projects. In CBO’s projections, economic growth gradually slows from 2019 to 2023. From 2024 to 2029, economic growth is largely determined by underlying trends in the growth of the labor force and productivity.
CBO’s updated projections incorporate the assumptions that new limits on discretionary funding contained in the Bipartisan Budget Act of 2019 (Public Law 116-37) will lead to higher federal discretionary outlays; that many temporary provisions of the 2017 tax act (P.L. 115-97, originally called the Tax Cuts and Jobs Act) will phase out or expire; and that U.S. tariffs imposed by the Administration and in effect as of July 25, 2019—as well as retaliatory tariff increases on U.S. exports implemented since January 2018—will remain in place through 2029. Also underlying CBO’s updated forecast is the expectation that the Federal Reserve will leave interest rates unchanged through most of 2020 and then start to increase them.
The Overall Economic Outlook
The economy was strong in 2018 and the first half of 2019. Real gross domestic product (GDP)—that is, the total output of goods and services, adjusted to remove the effects of inflation—grew at an average annual rate of 2.5 percent, unemployment remained low, and wages rose. As of mid-2019, many indicators point to a healthy labor market: Employment reached its maximum sustainable level in early 2018 and has since risen above it; the unemployment rate is near its lowest point since the 1960s; the labor force participation rate among prime-age workers (those between the ages of 25 and 54) has rebounded since 2015; and wage growth has picked up meaningfully over the past few years, with low-wage earners seeing particularly robust growth in their hourly wages.
In CBO’s projections for the next five years, the economy expands more slowly than it did in 2018 and early 2019 as the growth of consumer spending subsides; as growth in purchases by federal, state, and local governments ebbs; and as trade policies weigh on economic activity, particularly business investment. Real GDP grows by 2.3 percent in 2019 and then by 1.8 percent per year, on average, through 2023. After 2023, growth also averages 1.8 percent per year and is largely determined by the growth of potential GDP—which in turn is based mainly on CBO’s projections of underlying trends in key variables, such as the size of the labor force, the average number of labor hours per worker, capital investment, and productivity.
Effects of Fiscal and Trade Policies
Federal fiscal and trade policies under current law affect CBO’s economic forecast in a variety of ways. CBO expects that the positive effects of the 2017 tax act on investment growth will moderate over time. The agency also expects that the projected increase in federal discretionary spending will boost economic growth over the next few years but that the resulting increase in federal deficits will lower growth in later years. In addition, as temporary provisions of the tax act phase out or expire, real GDP growth is projected to temporarily slow in later years.
Changes in trade policies since January 2018—in particular, increases in tariff rates—affect CBO’s projections of trade flows, prices, household income, and U.S. output over the next decade. On balance, tariffs are projected to lower economic output, primarily by making consumer goods and investment goods (such as structures and equipment) more expensive. Uncertainty about future changes to trade policies also reduces business investment. In CBO’s projections, those economic effects wane after 2020 as businesses make adjustments to their supply chains to mitigate the costs associated with the tariffs.
Significant uncertainty surrounds CBO’s economic forecast, which the agency constructed to be the average of the distribution of possible outcomes if, through 2029, the federal policies embodied in current law were generally unchanged and the trade policies in effect when CBO completed its projections remained in place. If federal fiscal policies or trade policies changed, then economic outcomes would probably differ from CBO’s economic projections. (For example, if trade barriers were lowered or removed, economic growth could be faster than CBO projects; if trade barriers rose higher, economic growth could be slower than CBO projects.) Even if no changes were made to federal fiscal or trade policies, economic outcomes would still probably differ from CBO’s projections because of non-policy-related factors, such as unexpected changes in the underlying trends of productivity or labor force growth.
Comparisons With Other Projections
CBO’s current projections have some notable differences from the forecast the agency published in January 2019. In particular, CBO has lowered its projections of interest rates in response to new data and recent guidance from the Federal Reserve regarding its outlook for monetary policy. Projected economic growth over the next five years was revised upward, on average, because of the Bipartisan Budget Act of 2019 (which, again, led CBO to increase its projections of federal discretionary spending over the next decade) and recent economic developments. Also, CBO’s projections of the economy for the next two years are slightly more optimistic than the consensus view of the private-sector economists whose forecasts were published in the August 2019 Blue Chip Economic Indicators.
John Seliski is an analyst in CBO’s Macroeconomic Analysis Division.