CBO Interest Rates on Treasury The Economic Outlook for 2015 to 2025: An Update in 18 Slides

@ CONGRESSIONAL BUDGET OFFICE The Economic Outlook for 2015 to 2025: An Update in 18 Slides August 2015 For more details, see www. cbo. gov/ publicofion/50724.

CBO Under current law, CBO expects economic activity to expand modestly this year, to grow at a more solid pace in 2016 and 2017, and then to moderate in subsequent years.

CBO Growth of Real GDP Percent 6 ' Arlunl Pl<'w+r'| r~rl 2000 2005 2010 2015 2020 2025 Real (inflation-adjusted) GDP will grow by 2.0 percent this year, 3.1 percent in 20l 6, and 2.7 percent in 20l 7, CBC projects.

Contributions to the Growth of Real GDP Percentage Points 2 ’ 1 ' Business Investment Consumer _ 0 _ Spending l 1 _ Residential Investment I I or , . I 2015 2016 2017 2015 2016 2017 Consumer spending and investment are expected to drive the growth of real GDP over the next tew years, in CBO's estimation.

CBO What factors underlie the proiected contributions to the growth of real GDP?

CBO Real To'i'cEl ‘: Oi_’l. ’npei’| SCE'E'lOi‘| oil lEit. i§Jloyees Percentage Change 6 Actual Projected 2000 2005 2010 2015 2020 2025 Solid growth in the total amount of real compensation of employees is projected to support faster growth in consumer spending in the next few years.

CBO Business Investment Percentage of Potential GDP 20 7 Hrstarrctrl 3 Projected 15 10 2000 2005 2010 2015 2020 2025 Business investment will rise above current levels in the next few years as businesses make up for investments that they did not undertake during the recession.

CBO l-louseholcl lioi'nt. cE'i'ioit. Annual Change in the Number of Households, in Millions 2'0 7 Actual l’rr, rjLrclr, -Ll 1.5 - —~ 1.0 - 15 0.5 - C ‘ 0 l l l l l l l 2000 2005 2010 2015 2020 2025 An increase in the number of households is projected to boost the demand for housing and spur residential investment for the next few years.

CBO As the slack in the economy lessens over the next few years, slack in the labor market will also dissipate, CBO estimates.

CBO Rates of Short- and Long-Term Unemployment Percent 10 — 3 - 5 ' Short-Term Unemployment long-Term Unemployment 1994 1998 2002 2006 2010 2014 The overall unemployment rate remains elevated partly because of weakness in the demand for goods and services and partly because of the stigma and erosion of skills that can stem from long-term unemployment (being out of work tor 27 consecutive weeks or more).

CBO Underuse of Labor Percentage of the Labor Force Plus Marginally Attached Workers 20 16 12 Part Time for Economic Reasons Marginally Attached 1994 1998 2002 2006 2010 2014 The U-6 measure of the underuse of labor has fallen since the end of the recession but remains high: The percentage of people who are employed part time for economic reasons and the percentage of people who are marginally attached to the labor force are greater than they were before the recession began.

CBO Employment Shortfall Millions of People l0 T From llrxlrrrrrrrl f“lrj‘lll‘tl Unemployment ; 6 P 4 ' From 3 T Labor Force 2 i I I I I Participation ITINIIIIIIIII----II. -2 - - - t - t t ' ' I ' 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 The employment shortfall is the number of people who would be employed if the unemployment rate equaled its rate in December 2007 (the shortfall from unemployment) and if the labor force participation rate equaled its potential rate (the shortfall from labor force participation). The employment shortfall has dipped sharply since 2009 because of a decline in the unemployment rate but remains elevated—mostly because of low labor force participation.

CBO The Labor Force, Employment, and Unemployment Percentage of the Population 70 65 Unemployed 60 Employed 55 Labor Force Participation Rate 50 0 r 1955 1965 1975 1985 1995 2005 2015 2025 Even with employment gains, the percentage of the population that is employed is projected to fall because of declining participation in the labor force, mainly by baby boomers as they age and move into retirement.

CBO Labor Force Participation Rates Percent 68 _ Hrstrrrrrrrl Prrrjrrrtrrrl Potential I ion Rate 66 — 64 — Participation 62 ’ Rate 60 — 0 I ' l I I I 2000 2005 2010 2015 2020 2025 Some workers who left the labor force temporarily, or who stayed out of the labor force because of weak employment prospects, will enter it in the next few years as demand for labor continues to strengthen. Therefore, CBO expects the rate of labor force participation to move closer to its potential—the rate excluding the effects of the business cycle—over the next few years.

CBO Hourly Labor Compensation Percentage Change 5 T fplrrrrl PjI: Itr'r', I 2000 2005 2010 2015 2020 2025 Although hourly labor compensation has grown slowly in recent years, CBO projects that growth over the next several years will be stronger than in 2014, as the demand for workers continues to rise and slack in the labor market diminishes.

CBO Over the next few years, reduced slack in the economy—as evidenced by the narrowing gap between GDP and potential GDP—will put upward pressure on inflation and interest rates.

CBO GDP and Potential GDP Trillions of 2009 Dollars 24 - Hrslorrcrrl S Pl(J| l.‘(, l0(l 20— Potential GDP 16 — 12— 2000 2005 2010 2015 2020 2025 The gap between the economy's actual and potential output, adjusted for inflation, narrows to its historical average—about one-half of one percent of potential GDP—by the end of 201 7 in CBO's projection. 16

CBO Ln'FlcE'i'Eoii Percentage Change in the PCE Price Index 5 7 Actual l’rrrjr, rcl»: rl Overall 2000 2005 2010 2015 2020 2025 CBO anticipates that core prices will rise modestly, reflecting the remaining slack in the economy and widely held expectations for low and stable inflation. Note: PCE : personal consumption expenditures.

CBO Interest Rates on Treasury Securities Percent 7 _ Actual ProjcIclcIl 6 5 I0-Year Treasury Notes 4 . 3 » 3-Month Treasury Bills 2 _ 1 _ 0 . r ' . . 2000 2005 2010 2015 2020 2025 CBO projects that interest rates on Treasury securities will rise with the anticipated increase in the federal funds rate and with expectations of continued improvement in economic conditions. 18

About This Document Christine Bogusz, Maureen Costantino, Kim Kowalewski, John Skeen, and Shiqi Zheng prepared these slides. For more details about the economic outlook as well as the agency's most recent budget projections, see An Update to the Budget and Economic Outlook: 2015 to 2025 (August 2015), wvvw. cbo. gov/ publication/50724. That report is the result of work by many analysts at CBO.