Output Gap Shrinking, but Still $380 Billion in 2021

Output Gap Shrinking, but Still $380 Billion in 2021

Nathan J Fish/Sun-News

The U.S. economy will perform well below potential in 2021, according to the Congressional Budget Office outlook issued Monday. The output gap – the difference between gross domestic product as recorded and what it would be if the economy were working at full capacity – will total $380 billion this year, CBO said, despite the ongoing recovery. The output gap will persist even as it shrinks on an annual basis, totaling roughly $760 billion over the next three years.

Without the aggressive fiscal response to the Covid pandemic by Congress, the output gap would have been considerably larger. According to the Committee for a Responsible Federal Budget, “nearly $3 trillion of disbursed fiscal support and efforts to adapt to the pandemic have shrunk the output gap substantially to 4 percent in the third quarter of 2020, 3 percent by the fourth quarter, and a projected 2 percent, or $130 billion, this quarter.”

Here's a look at the current trendline for the output gap from the CRFB, which includes only approved Covid relief spending so far.