CBO Chief: It’s Not All Bad News On The Economy

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The U.S. economy remains weak and serious outside threats could weaken it further, but Doug Elmendorf, director of the Congressional Budget Office, says there are also indications that the economy could perform better than most forecasters expect.

“In broad terms the view we had in January of an economy that we expect to grow slowly I think still holds,” Elmendorf said at a breakfast roundtable with reporters in Washington Wednesday, hosted by the Christian Science Monitor.

On the downside, Elmendorf noted, the financial crisis in the Eurozone is more dire than it’s ever been before.

“[W]hether they will be able to preserve the Euro, I think is unclear,” Elmendorf warned. “And if European economies slow more than they already have, and especially if there is some greater tumult in the European financial system, that will be bad news for the U.S. economy.”

But there are quieter signs that the U.S. economy could rebound faster than recent gloom and doom news suggests, and Elmendorf listed several.

“I think one possibility is that housing will start to rebound more sharply than we’ve projected,” Elmendorf said, citing pent up demand. “The underlying fundamentals suggest that we could use a lot more housing construction over time than we have right now.”

Additionally, Elmendorf said, “Businesses are sitting on a lot of cash. They have not shown a great interest in using that. But why they haven’t is not entirely clear. … Business investment in fact is growing very strongly, but from a depressed level — it fell very sharply during the downturn. So it’s been growing rapidly in the last couple years. It’s still at a low level relative to the size of the economy, relative to the size of the capital stock, and businesses might decide they want to do more investment.”

Counterintuitively, the fact that the unemployment rate remains high means there could be a surge in hiring. “The unemployment rate has fallen more sharply than we and most analysts expected,” Elmendorf added. “Just why that’s happening is also a bit of a puzzle. But it raises the possibility that there is more strength in the labor market than we expect. It’s not at all impossible that more of the underlying strength of the economy could show itself in the next year or two.”

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