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August 24, 2012

CBO Economic Projection: 10 Years Before and After

By Bruce Krasting

The Congressional Budget Office came out with its Update to the Budget and Economic Outlook 2012 – 2022 yesterday (Link). The press jumped on the report’s conclusion that the consequences of not dealing with the fiscal cliff will cause a recession in 2013. The CBO thought it might result in 0.5% YoY drop in GDP.
Ho Hum to that. If the country does not come up with some compromises, and we do fall of the fiscal cliff, the recession will be much large than a half percent decline. 
For the hell of it, I looked up the CBO report for 2002. This report contains the forecast for calendar year 2012. In a number of critical areas, the CBO missed by a mile:.
CBO- Ten Years After (amounts in Trillions)
I don’t blame the CBO for these big misses. It is not its job to predict wars and the biggest recession in 80 years. But a look at what was thought to be reasonable a decade ago shows that the expectations were not reasonable at all. Bad “stuff” happens. Bubbles, wars and recessions can’t be predicted with any degree of accuracy, but it is predictable that they will occur.
The August 2012 CBO report look into the future with same bleary eyes that contemplated the outlook in 2002. If there are no unanticipated hiccups over the next decade (there will be) the fiscal and economic imbalances that are with us today will be eliminated. The CBO expects that nominal growth will average 4.5% (real GDP growth = 2.4% – (no recession!). Inflation will be tame (Core PCE =2%) and today’s Debt to Public will fall from 73% to 58%. All is well.
Two final pics. The first from 2002, is a look at how quickly the US would go into surplus, the second from 2012 shows the reality..
I don’t think it’s possible for the CBO to miss the 2012 ten-year projection of Debt to GDP by 400% as it a decade ago. If that were to occur, debt/GDP would push towards 300%. That can’t happen. The country would simply blow up before we got to that level. But there are significant forecasting errors in the latest CBO outlook, we will just have to wait to see what they missed.
About The Author - Bruce Krasting had worked on Wall Street for 25 years--"For 25 years I woke up thinking, "What am I going to do today to make some money in the market". I don't do that any longer. But I miss it." Nowadays, Bruce blogs about his take on financial events at Bruce Krasting(EconMatters author archive here.)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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