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Congressional Budget Office Forecasts Faster Than Expected Rebound From COVID-19

  • Congressional Budget Office offers rosy projections for next decade, suggesting that GDP will recover to pre-pandemic levels later this year even without additional stimulus
  • Forecast calls for a slower recovery in the labor market, anticipating that it will return to its pre-pandemic size in 2022 while the unemployment rate won’t hit pre-pandemic levels until 2024
  • Report by the nonpartisan office adds new factor to debate over further stimulus proposed by the Biden administration

The Congressional Budget Office has issued an optimistic forecast for economic growth in the United States over the next decade, anticipating that the nation’s GDP will return to pre-pandemic levels later this year. However, the nonpartisan also expects a slower recovery in the labor market.

It its economic overlook for 2021-2031, the CBO says it expects that widespread distribution of the COVID-19 pandemic will help resume the economic expansion that began in mid-2020. The forecast anticipates GDP growth of 3.7 percent in 2021, reaching pre-pandemic levels by the middle of the year. The report calls for an average GDP growth of 2.6 percent between 2021 and 2025, slowing to average growth of 1.6 percent between 2026 and 2031.

The CBO says the recovery is based in part on federal economic stimulus efforts aimed at bolstering the economy during the pandemic in 2020. While partisan divisions hindered efforts to strike a new deal on economic stimulus in the latter half of 2020, Congress ultimately approved a $900 billion package in December; the CBO says this is expected to contribute to GDP growth of approximately 1.5 percent in 2021 and 2022.

The report says that mandatory and voluntary business restrictions and other hurdles created by the pandemic have caused severe economic disruptions, but that these have been concentrated in certain economic sectors such as travel and hospitality. It says its projections are based in part on many economic sectors adapting to the situation better than expected, and no new economic stimulus is included in the calculations.

The report is sure to play a role in debate over the $1.9 trillion in new aid proposed by President Joe Biden. Critics say is an unnecessarily high figure to support economic recovery; other forecasts have suggested that the aid will help accelerate GDP growth. A group of 10 Republican senators has proposed a $618 billion package of targeted aid.

While the CBO expects that GDP will recover swiftly, it expects that the labor market won’t bounce back nearly as quickly. It suggests that the labor force, including all workers ages 16 and older who are employed or actively seeking work, will return to its pre-pandemic size in 2022. The forecast says the unemployment rate will drop gradually over the next five years, falling to 5.3 percent by the end of 2021, and reach its pre-pandemic level in 2024. The CBO also notes how low-wage workers have suffered the brunt of the job losses during the pandemic.

The CBO expects the Federal Reserve to continue its policies of maintaining low interest rates and purchasing long-term securities. However, it doesn’t expect that inflation will exceed the 2 percent ceiling set by the Fed until after 2023. The Fed has previously indicated that it may allow inflation to exceed this cap to assist with the labor recovery, although higher inflation would eventually prompt less accommodative policies.

The report cautions that there is a considerable amount of uncertainty in the projections, and that the economic recovery could proceed much slower or faster than anticipated. The CBO says influencing factors include the effectiveness of monetary policies, how global financial markets will respond to substantial increases in deficits or debts, and the effects of the pandemic, including the long-term impact on factors such as the labor force and technological innovation.

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