February 14, 2011
The economic forecast underlying the Obama administration’s new fiscal 2012 budget shows moderately stronger growth this year than in 2010, continued subdued inflation and a stubbornly high jobless rate of 9.3 percent this year and 8.6 percent in 2013.
This is no rosy scenario crafted to allow budget deficits to look smaller than they would with a different set of projections. The 3.1 percent estimate for this year’s rise in the gross domestic product is exactly the same as in latest forecast from the Congressional Budget Office and little different from the latest outlook update from the International Monetary Fund and the most recent number in the Blue Chip Economic Indicators compilation of private forecasts.
More importantly, the administration’s growth figures could be too modest, at least in the short term. They are lower than those of some prominent forecasters, such as those at Macroeconomic Advisers and Goldman Sachs. For one thing, getting the budget out this month meant the administration forecast had to be locked up in mid-November and CBO’s in early December. Both therefore missed an apparent acceleration in growth late last year and the surprising plunge in the unemployment rate from 9.8 percent in November to 9 percent last month.
Chris Varvares of Macroeconomic Advisers said in an interview that acceleration and the new stimulus in the tax legislation agreed to by Obama and congressional Republicans in December provided “a pretty solid jump off” for the economy this year. His firm expects growth over the course of 2011 to reach 4.3 percent, aided by the 2 percentage point cut in the Social Security payroll tax rate and the extension of long-term unemployment insurance benefits.
Moreover, Varvares said that unlike last year when the big risk was that growth would turn out to be weaker than expected, the risks now appear to be balanced. That is, it’s as likely growth will exceed 4.3 percent as fall short of it. “Would you believe a 6 percent quarter in the second half?” he asked.
Such faster growth could bring the jobless rate down to about 8.5 percent in this year’s fourth quarter — about what the administration predicts as an average for 2012. As for inflation, Macroeconomic Advisers and CBO expect if anything it will be more subdued than in the Obama forecast.
Goldman Sachs economists have told the firm’s clients to look for GDP gains to accelerate to a 4 percent pace this spring and to be between 3 and 4 percent for the year, with unemployment falling only to 9 percent by the end of the year while core inflation — that is excluding volatile food and energy prices — remains less than 1 percent.
The forecasts begin to diverge in 2013. Macroeconomic Advisers and Goldman Sachs expects growth to dip back to about 3.5 percent, the Blue Chip average shows 3.2 percent and CBO only 2.8 percent. In contrast, the administration forecast has growth accelerating to 4 percent in 2012 and on to 4.5 percent in 2013. CBO also has it increasing in 2013 but only to 3.5 percent.
All of the forecasts, however, show the jobless rate falling to around 7.5 percent in 2013.
The latest round of Federal Reserve officials’ forecasts generally were similar to the administration’s figures, including an expectation that growth would continue to accelerate in 2012 and 2013. Two Fed officials predicted that growth this year would be as low as 2.4 percent to 2.7 percent while a majority thought it would be around 3.5 percent.
In the explanation of the administration forecast, the Analytical Perspectives portion of the budget says, “The U.S. economy has enormous room for growth in 2011, although there are factors that could limit that growth. On the positive side, real GDP grew 3.2 percent in the fourth quarter, and 2011 should get off to a solid start.”
Those factors include potentially lingering effects from the financial crisis, slow foreign growth that might restrain demand for U.S. exports and the phasing out of the stimulus package enacted early in 2009.
The Analytical Perspectives section also provides estimates of how the deficit might change if economic growth were faster or slower than shown in the forecast. For instance, if growth was about a percentage point faster this year — as in the Macroeconomic Advisers forecast — it would lower the deficit by about $19 billion in fiscal 2011 and about $43 billion the following year.
To read more of The Fiscal Times’ complete coverage of the Obama 2012 Budget, click here
White House Projects 2.7% Growth (Bloomberg)
Voter Ignorance Threatens Deficit Reduction (The Fiscal Times)
Goldman Sachs 2011 Forecast: Stock, Gold, Oil Higher (CNBC)