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Pre-Pandemic Economic Levels on the Horizon: CBO Outlook

In the absence of any more unforeseen circumstances, a new report from the Congressional Budget Office (CBO) projects that the U.S. economic expansion that began in mid-2020 will continue.

Specifically, real (inflation-adjusted) gross domestic product (GDP) is projected to return to its pre-pandemic level in mid-2021 and to surpass its maximum sustainable level in early 2025.

The CBO, which offers nonpartisan analysis for Congress, details how the 2020–2021 coronavirus pandemic caused severe economic disruptions last year, as households, governments and businesses adopted a variety of mandatory and voluntary measures–such as mask wearing and social distancing–to limit in-person interactions that could spread the virus.

The report, “An Overview of the Economic Outlook: 2021 to 2031,” said the impact was focused on particular sectors of the economy, such as travel and hospitality, and job losses were concentrated among lower-wage workers. Over the course of the coming year, vaccination is expected to greatly reduce the number of new cases of COVID-19, the disease caused by the coronavirus. As a result, the extent of social distancing is expected to decline.

In its new economic forecast, the CBO projects the unemployment rate to gradually decline through 2026, with the number of people employed returning to its pre-pandemic level in 2024. CBO is using this economic forecast as the basis for updating its budget projections for 2021 to 2031. The agency plans to release those budget projections later in February and a more detailed report about this forecast later this winter.

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In CBO’s forecast, the economy continues to strengthen during the next five years, although it doesn’t take into account significant changes in federal tax structure or expenditures. The annual growth of real GDP averages 2.6 percent in the next five years. Labor market conditions continue to improve as the economy expands, CBO said, with many people rejoining the civilian labor force who had left it during the pandemic, restoring it to its pre-pandemic size in 2022. The unemployment rate gradually declines throughout the period and the number of people employed returns to its pre-pandemic level in 2024.

Inflation, as measured by the price index for personal consumption expenditures, rises gradually over the next few years and rises above 2 percent after 2023, as the Federal Reserve maintains low interest rates and continues to purchase long-term securities, CBO predicts.

CBO said its projections of economic growth were boosted by various laws enacted in 2020. Most recently, in late December, the Consolidated Appropriations Act, 2021, appropriated funds for the remainder of fiscal year 2021, provided additional emergency funding for federal agencies to respond to the public health emergency created by the pandemic and provided financial support to households, businesses and nonfederal governments affected by the economic downturn. CBO estimates that the pandemic-related provisions in that legislation will add $774 billion to the deficit in fiscal year 2021 and $98 billion in 2022.

In CBO’s projections, the economy continues to expand from 2026 to 2031. Real GDP grows 1.6 percent per year, on average. For most of the period, the Federal Reserve allows inflation to remain above its target level. Eventually, less accommodative policies on the part of the Federal Reserve helps push GDP back toward its historical average relationship with potential GDP.

A mild increase in productivity growth causes potential output in CBO’s projections to grow more quickly over the 2021–2031 period than it has grown since the 2007–2009 recession. However, potential output still grows more slowly than it has grown since 1950, mainly because of an ongoing, long-term slowdown in the growth of the labor force.

Uncertainties in the Economic Outlook CBO’s projections reflect an average of possible outcomes under current law.

“But these projections are subject to an unusually high degree of uncertainty and that uncertainty stems from many sources, including 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,” CBO said. “As a result, the economy could expand substantially more quickly or more slowly than CBO projects. Labor market conditions could likewise improve more quickly or slowly than projected, and inflation and interest rates could rise more rapidly or slowly, as well. Also uncertain is the impact of the pandemic on the economy over the longer term, including its effects on productivity, the labor force and technological innovation.”