When the Trend is Not Your Friend

August 25th, 2011 at 4:10 am

Had a rousing policy debate on the Diane Rehm radio show the other day, where we stumbled on a theme I’ve tried to raise on these pages as well: that of the feared double dip.

My point is that while we want to do everything we can to avoid another contraction in the overall economy, slow growth is as much our enemy as negative growth.  (Want to sound like an economist and annoy people!?  Say “negative growth” in place of “decline.”)

New projections, out today from CBO, show you what I mean.  The two figures compare forecasts they released in January of this year to those released today, for real GDP and unemployment.  The key takeaway is that if GDP is growing, yet growing too slowly, unemployment won’t fall.  And with slower near-term GDP growth in their forecast, their near-term unemployment rate forecast goes up as well.

Source: CBO August Outlook, link above.

CBO projects the real annual growth of the economy to be at or below trend—with trend=2.3% according to today’s release—for the next few years (it grows more slowly in the new forecast for a couple of years, and then catches up).  The rule of thumb is that as long as the economy is expanding in the neighborhood of the trend, we’ll be creating just enough economic activity to keep up with the growth of working age population.  To get the jobless rate heading south, we need to grow significantly faster than that.

CBO, August Outlook, link above.

Interestingly, picking up on another recent theme, CBO’s economic projections (both Jan and Aug versions) assume we follow “current law,” meaning full sunset of the Bush tax cuts.  But the new version also features other reductions from the new Budget Control Act.  These lower the deficit but also growth in the near term.

Here’s my CBPP colleague Jim Horney’s take on the CBO Update.

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2 comments in reply to "When the Trend is Not Your Friend"

  1. Carol says:

    Things turn rosy just in time for the TPers to take credit for it.

  2. fausto412 says:

    So how exactly does unemployment fall to 6% in 2015?

    all projections i have seen in the past never showed this. we aren’t growing at a pace of 4% gdp growth. we are not adding 400,000 jobs a month.

    is the CBO on crack?