The CBO published a Updated economic outlook yesterday. Projected PCE inflation is higher, as are budget deficits. First cut in the federal funds rate in the first quarter of 2025. For me, the most interesting are the GDP projections, including potential GDP.
Here is the GDP projection for June and February.
Figure 1: GDP as reported (bold black), February CBO (red), June CBO (blue), FT-Booth median (scarlet triangle), GDPNow as of June 18 (light blue square), all in Ch.2017 billions $SAAR. Source: BEA (2024Q1 2nd release, CBO February Budget and Economic Outlook, CBO June Economic Outlook Updatemacroeconomist survey by June Booth, Atlanta Fed.
CBO projections are based on data available as of May 2. The latest CBO projection is significantly higher than the February projection (see discussion here), largely because of the upward GDP surprises that have taken place in the meantime. It is currently in line with the June FT-Booth median forecast and slightly lower (for the second quarter) than the Atlanta Fed’s nowcast. (This is slightly above the May median estimate from the survey of professional forecasters).
Although the revised quarterly growth rate projections are higher in the near term compared to the February forecast (based on data available as of January 6), they will then decelerate to slower rates by the end of 2025, which implies a return to potential. That being said, the CBO’s current implicit projection for the output gap is dramatically different from that reported in the February Economic Outlook. (Update: As suggested Paweł Skrzypczyński, the implied output gap is even larger using the SEP and CBO potential. However, we don’t know what the FOMC’s view is on potential GDP, although the Green Paper should contain an estimate.)
Figure 2 (updated at 1 p.m. CT): Log of output gap, % (bold black), February CBO projection (red), June CBO projection (blue), summary of June FOMC economic projections (inverted light green triangle). Figures shown are based on reported GDP and potential GDP estimated by the CBO for June. Source: BEA (2024Q1 2nd release, CBO February Budget and Economic Outlook, CBO June Economic Outlook Update, Federal Reserveand the author’s calculations.
This means that the CBO projects a positive output gap for the next 18 months, consistent with current law. For comparison, the maximum output gap before the pandemic was 0.9 percentage points, while the highest in recent history was 2.4% in the second quarter of 2000.
Interestingly, the CBO projection is based on the assumption that the Fed will begin cutting the federal funds rate in the first quarter of 2025; This contrasts with the expected rate cut of around 60 basis points (on average) by the end of 2024 in the February projection.
Figure 3: Federal funds rate (bold black), February CBO projection (red), June CBO projection (blue), all in %, period average. Source: Federal Reserve, February CBO Budget and Economic Outlook, CBO June Economic Outlook Update.
