Worse Than It Looks: CBO Says Economic Outlook More Dire Than Reported

August 24, 2011 6:52 a.m.

Partisans will surely find things to love and hate about CBO’s updated economic outlook. It projects that the 2011 deficit will be lower than the last two years’ deficits, but still near record highs. It forecasts a slow but steady economic recovery over the next six years. And it makes clear that the country’s medium-term fiscal imbalances are manageable unless lawmakers decide to screw things up.

But there’s also a major, major caveat.

“CBO initially completed its economic forecast in early July, but it updated the forecast in early August to reflect the policy changes enacted in the Budget Control Act [the debt limit deal],” the report reads. “However, the forecast described here does not reflect any other developments since early July, including the recent swings in financial markets, weakness in certain economic indicators, and the annual revision to the national income and product accounts. Incorporating that news would have led CBO to temper its near-term forecast for economic growth.”Emphasis added.

This is why the CBO’s forecast for slow but steady recovery differs so markedly from private sector forecasts, which are increasingly leery of a double dip recession and project growth at levels much lower than previously expected.

It’s depressing news for the country, still suffering with unemployment above 9 percent, and a tough political reality for President Obama, who will likely face re-election under dire economic circumstances. Even if you ignore CBO’s caveat their forecast still projected unemployment “to fall from 9.1 percent in the second quarter of 2011 to 8.9 percent in the fourth quarter of the year and to 8.5 percent in the fourth quarter of 2012.”

Pinpointing the causes of market turmoil isn’t science — and it’s often a biased Rorschach test — but many analysts say the congressional brinkmanship over the debt limit in July deal contributed to recent swings.

Because CBO uses current law as a baseline, it projects deficits to fall markedly over the course of the decade, in large part because the Bush tax cuts are set to expire. However the forecast could look much more bleak if those tax cuts were extended; or indeed if the government were to enact new stimulus measures and yet still see anemic growth.

Read the full report:

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