As President Biden and lawmakers discuss the appropriate size of the next coronavirus relief bill, the Congressional Budget Office on Monday upgraded its outlook for the U.S. economy, projecting that gross domestic product would grow faster than it had previously forecast and that the labor market would rebound more quickly.
In a report on the economic outlook over the next decade, CBO forecast that the economy will grow by 4.6% in 2021 (3.7% from fourth quarter 2020 to fourth quarter 2021), reaching its pre-pandemic peak size by the middle of this year. CBO sees growth averaging 1.7% a year from 2020 to 2024, up from 1.0% as of last July.
A longer recovery for labor market: The nonpartisan budget scorekeeper said the job market will take longer to fully recover. It projected that the unemployment rate, 6.7% as of December, will fall to 5.3% by the end of 2021, down from a projected 7.6% in its forecast from seven months ago. At the same time, CBO said that it will take until 2022 for the labor force to return to its pre-pandemic size — and until 2024 for the number of people employed to again reach its pre-pandemic level.
CBO said it upgraded its economic outlook for the next five years “in large part because the downturn was not as severe as expected and because the first stage of the recovery took place sooner and was stronger than expected.” The $900 billion pandemic relief package Congress passed in December was also a factor, as CBO said it would boost GDP by an average of 1.5% over this year and next.
The budget scorekeeper said that the December relief package will add $774 billion to the deficit in fiscal year 2021 and $98 billion in 2022.
But while CBO said the near-term outlook had improved, it downgraded its longer-term forecast, projecting 1.7% annual growth from 2025 to 2030, weaker than the 2.1% annual growth it had projected in July.
Why it matters: The latest forecast does not assume any additional stimulus, but it offers something for everyone in the debate over the next package. Republicans looking to scale back the size of the next bill can point to the rosier economic projections and CBO’s assessment that the downturn wasn’t as bad as feared. Democrats can point to the weaker long-term forecast and the outlook for the labor market as evidence that the economy still needs further support.