Faster U.S. rebound will complicate stimulus talks

BUDGET OFFICE

The U.S. Congressional Budget Office predicted the U.S. economy will recover faster than previously expected from the pandemic slump — an upgrade that could make it harder for President Joe Biden to win support for his US$1.9-trillion relief plan.

The CBO, a nonpartisan arm of the legislature, forecast that gross domestic product will increase at an average annual rate of 1.7 per cent between 2020 and 2024, according to its economic outlook released Monday. That's 0.7 percentage point higher than the last estimate in July. Since then the rollout of vaccines has begun, bringing the pandemic's end into clearer sight.

The stronger forecast could bolster Republican objections to Biden's aid proposal, which includes cheques for households, increased unemployment benefits and more cash for vaccine distribution.

The CBO said it upgraded growth forecasts because “the downturn was not as severe as expected” while the recovery was quicker and stronger. It also said the last round of stimulus, approved in December, “played a part in improving the economic outlook.”

Still, recent economic data have pointed to an unequal recovery that hasn't reached many low-income Americans, and the potential for more near-term pain as the labour market stumbles.

Democrats could also cite a downgrade in the longer-term CBO forecast as evidence that the economy still needs significant help. The agency sees 1.7-per-cent annual growth in the 20252030 period, down from 2.1 per cent forecast in the July report.

“It's not just about whether you get to full employment, but the speed at which that happens,” said Gene Sperling, former director of the National Economic Council under presidents Bill Clinton and Barack Obama, on a conference call with journalists Monday. Sperling and more than 100 economists say a sweeping fiscal aid package is still necessary to bring back jobs and boost the economy.

The Committee for a Responsible Federal Budget said the upgraded CBO forecast shows that the economy is recovering and that lawmakers should be more targeted with additional stimulus.

“Congress should spend whatever is necessary to accomplish these goals, but they shouldn't issue a blank cheque,” said Maya MacGuineas, president of the group, in a statement.

The CBO forecasts that the Federal Reserve's preferred measure of inflation will rise above the target level of two per cent after 2023, as the central bank keeps interest rates low and continues to buy long-term securities. The agency doesn't expect any big spike in prices, with the gauge averaging 2.1 per cent from 2024 to 2031.

The Fed has signalled it won't tighten monetary policy until it has clear signs that inflation is heading toward its target.

The CBO estimate incorporates the most recent US$900-billion stimulus package but not Biden's US$1.9-trillion proposal. The Washington-based agency said the projections “are subject to an unusually high degree of uncertainty” stemming from “the course of the pandemic, the effectiveness of monetary and fiscal policies, and the response of global financial markets to substantial increases in public deficits and debt.”

The CBO also forecasts that the yield on the 10-year Treasury note will average 1.1 per cent this year and 1.3 per cent in 2022, slightly above the previous projections. It expects a rate averaging 2.8 per cent from 2025 to 2030, which means the cost of government borrowing would rise in the coming years, reversing a decades-long downward trend.