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The 2016 Economic Outlook in 17 Slides

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This presentation of the economic outlook for the coming decade highlights the key findings from CBO’s report The Budget and Economic Outlook: 2016 to 2026, which was released in January.

The 2016 Economic Outlook in 17 Slides

  1. @ CONGRESSIONAL BUDGET OFFICE The Economic Outlook for 2016 to 2026 in 17 Slides February 2016 For more details, see wvvw. cbo. gov/ publication/51129.
  2. CBO CBO expects that under current law economic activity will expand solidly in 2016 and 2017—faster than the rate experienced last year—and then moderate in subsequent years.
  3. CBO Growth of Real GDP Percent, Fourth Quarter to Fourth Quarter 6 F Actual Projected 4 2:7 25 }2.0 0 -2 _4 I I I I I 2001 2006 2011 2016 2021 2026 Real (inflation—adjusted) GDP will grow by 2.7 percent this year and 2.5 percent in 2017, CBO projects. On January 29, 2015, after CBO's economic forecast was published, the Bureau of Economic Analysis reported that real GDP growth for 2015 was 1.8 percent.
  4. CBO Projected Contributions to the Growth of Real GDP Percentage Points 1 2 Business Investment 0 Consumer 1 Spending Residential Investment I 0 0 C I 2015 2016 2017 2015 2016 2017 (Estimated) (Estimated) CBO expects that consumer spending and both business and residential investment will drive growth of real GDP in coming years.
  5. CBO What factors underlie the projected contributions to the growth of real GDP?
  6. CBO Total Real Compensation of Employees Percentage Change 6 ' Actual Projected 2001 2006 2011 2016 2021 2026 Solid growth in the total amount of real compensation of employees is projected to support growth in consumer spending in the next few years.
  7. CBO Effects of Output Growth on the Growth of Business Fixed Investment Percent 15 ' Growth of Historical 3 Projected Business Fixed other Effects I Investment 10* Growth Effects 2001 2006 2011 2016 2021 2026 CBO expects that past output growth and expected growth in the future will significantly boost business investment this year and next—as businesses acquire new assets to meet actual and anticipated demand fortheir goods and services—but will provide a smaller boost in later years as output growth slows.
  8. Household Formation Millions of Households 2.0 Actual Projected 2001 2006 2011 2016 2021 2026 Household formation, along with robust demand for replacement housing units and less restrictive mortgage lending standards, will contribute to solid growth in residential investment over the next few years.
  9. CBO CBO expects the economic expansion over the next few years to reduce the slack in the labor market; in later years, growth in employment will be constrained by relatively slow growth in the labor force.
  10. CBO Rates of Short- and Long-Term Unemployment Percent 8 Short-Term Unemployment 4 2 Long-Term Unemployment 0 I 1994 1998 2002 2006 2010 2014 Most of the decline in the overall unemployment rate in the past few years reflected a drop in long-term unemployment (being out of work for 27 consecutive weeks or more), suggesting that the effects of stigma and the erosion of skills that can stem from long-term unemployment are diminishing.
  11. CBO Employment Shortfall Millions of People I0 ' Historical 3 Projected Total 8 F I From Unemployment 6 F I 4 - From Labor Force 2 — I l Participation ‘i INNIII-I-----II. .. 0 . -2 ~ I I I 2008 2011 2014 2017 2020 The employment shortfall is the number of people who would be employed ifthe unemployment rate equaled its natural rate (that arising from all sources except fluctuations in the overall demand for goods and services) and ifthe labor force participation rate equaled its potential rate. The employment shortfall has dropped sharply since 2009 because of a decline in the unemployment rate; it currently remains elevated, however, mostly from low labor force participation. (0
  12. CBO The Labor Force, Employment, and Unemployment Percentage of the Population 70 Actual E Projected 65 60 55 Labor Force Participation 50 _ Rate 0 l l I l l l l 1955 1965 1975 1985 1995 2005 2015 2025 The percentage of the population that is employed is projected to remain roughly unchanged over the next few years and then decrease through 2026 because of declining participation in the labor force, mainly by baby boomers as they age and move into retirement.
  13. CBO Labor Force Participation Rates Percent 68 ' Historical Projected Potential —64.0 — 66 » Participationj Rate I 63.5 64 ~ 63.0 - Participation 62.5 — 62 F Rate -m I 62.0 - 60 —» ” 615 ~ - - - - 2015 2016 2017 2018 2019 2020 0 I I ‘ I I I 2001 2006 2011 2016 2021 2026 The rate of labor force participation—although expected to remain largely unchanged over the coming year—is projected to decline, along with the potential participation rate, through 2026. Those projected declines reflect several factors, the most important being the aging of members of the baby-boom generation. The lingering effects of the recession and ensuing weak recovery, as well as certain aspects ofthe government’s tax and spending policies, will also push down participation.
  14. CBO Hourly Labor Compensation Percentage Change 5 ’ Actual j Projected 2001 2006 2011 2016 2021 2026 CBO projects that, overthe next several years, labor compensation will rise more rapidly than it did in 2015, spurred by continued gains in the demand for labor, which will reduce slack in the labor market, and faster growth in productivity and prices.
  15. CBO Over the next few years, a near elimination of slack in the economy- as evidenced by the closing gap between GDP and potential GDP- will put upward pressure on inflation and interest rates.
  16. CBO GDP and Potential GDP Trillions of 2009 Dollars 24 ’ Historical Projected 20 Potential GDP 16 12 0 2001 2006 2011 2016 2021 2026 The gap between the economy’s actual and potential output will be largely eliminated by the middle of 2018, CBO projects, and then increase to its historical average—about one-half of one percent of potential GDP—by 2020.
  17. CBO Inflation Percentage Change in PCE Price Indexes 5 _ Actual 3 Projected Overall 3 _ 2 _ ’ 2001 2006 2011 2016 2021 2026 CBO anticipates that inflation will rise to the Federal Reserve’s goal of 2 percent over the next two years, which is consistent with CBO’s projection of the diminishing slack in the economy. PCE = personal consumption expenditures; the core rate excludes prices for food and energy.
  18. CBO Interest Rates on Treasury Securities Percent 5 Projected ' Actual I 10-Year Treasury Notes 3—Month Treasury Bills 2021 2026 2011 2016 2001 2006 CBO projects that interest rates on Treasury securities will rise steadily over the next few years, reflecting continued economic improvement and increases in the federal funds rate.
  19. About This Document Leigh Angres, Christine Bogusz, Lauren Bresnahan, Maureen Costantino, Kim Kowalewski, Leah Loversky, and Shiqi Zheng prepared these slides. For more details about the economic outlook as well as the agency’s most recent budget projections, see The Budget and Economic Outlook: 2016 to 2026 (January 2016), www. cbo. gov/ publication/51129. That report is the result of work by many analysts at CBO.

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