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THE ECONOMIC AND BUDGET OUTLOOK:
AN UPDATE
The Congress of the United States
Congressional Budget Office
NOTES
Unless otherwise indicated, all years referred to in Chapter 1 are calendar years and all years in Chapter 2 are fiscal years.
Some figures in this report indicate periods of recession by using shaded vertical bars. The bars extend from the peak to the trough of the recession.
Unemployment rates throughout the report are calculated on the basis of the civilian labor force.
Numbers in the text and tables may not add to totals because of rounding.
National income and product accounts (NIPA) data shown in the tables incorporate the revised data for calendar years 1993 through 1996 and the first two quarters of 1997 that were released on July 31, 1997.
Preface

This volume is one of a series of reports on the state of the economy and the budget that the Congressional Budget Office (CBO) issues each year. It satisfies the requirement of section 202(e) of the Congressional Budget Act of 1974 that CBO submit periodic reports to the Committees on the Budget with respect to fiscal policy. In accordance with CBO's mandate to provide objective and impartial analysis, the report contains no recommendations.

The analysis of the economic outlook presented in Chapter 1 was prepared by the Macroeconomic Analysis Division under the direction of Robert Dennis and John F. Peterson. Ed Gamber wrote the chapter, with assistance from Robert Arnold. Matthew Salomon carried out the economic forecast and projections. Sandra Cannon, Douglas Hamilton, Juann Hung, Kim Kowalewski, Joyce Manchester, Angelo Mascaro, Benjamin Page, Frank Russek, Kent Smetters, John Sturrock, Jan Walliser, and Christopher Williams provided comments and background analysis. Ken Fears, Timothy Lasocki, and Michael Simpson provided research assistance.

The baseline outlay projections were prepared by the staff of the Budget Analysis Division under the supervision of Paul N. Van de Water, Robert Sunshine, Priscilla Aycock, Paul Cullinan, Peter Fontaine, James Horney, Michael Miller, and Murray Ross. The revenue estimates were prepared by the staff of the Tax Analysis Division under the supervision of Rosemary D. Marcuss and Richard Kasten. The estimates of the revenue effects of enacted legislation were provided by the Joint Committee on Taxation. Jeffrey Holland wrote Chapter 2. Matthew Salomon wrote Appendix A, and John F. Peterson wrote Appendix B. Dan Kowalski wrote Appendix C, with assistance from Jennifer Winkler. The principal contributors to the revenue and spending estimates and analyses are listed in Appendix D. Dan Kowalski also wrote the summary of the report.

At a recent meeting, CBO's Panel of Economic Advisers discussed an early version of the economic forecast underlying this report. Members of that panel are Robert J. Barro, Michael Boskin, Barry P. Bosworth, Robert Dedrick, Rudiger Dornbusch, Martin Feldstein, Robert J. Gordon, Lyle E. Gramley, Robert E. Hall, Marvin Kosters, Anne Krueger, N. Gregory Mankiw, Allan Meltzer, Rudolph Penner, James Poterba, Robert Reischauer, Sherwin Rosen, Joel Slemrod, John Taylor, and James Tobin. Stuart Altman, Robert E. Mellman, Joel Prakken, and Victor Zarnowitz attended the meeting as guests. Despite the considerable assistance afforded by those outside advisers, they are not responsible for any errors in the analyses in this report.

Paul L. Houts supervised the editing of this volume. Major portions were edited by Paul L. Houts, Sherry Snyder, and Sherwood Kohn, with the assistance of Christian Spoor. The authors owe thanks to Marion Curry, Linda Lewis Harris, Denise Jordan, Dorothy Kornegay, and Simone Thomas, who assisted in producing sections of the report. Kathryn Quattrone and Jill Sands prepared the entire report for publication.

June E. O'Neill
Director
September 1997
 
Contents

SUMMARY

ONE - THE ECONOMIC OUTLOOK
 
    The State of the Economy
    The Economic Outlook
    Risks to the Economic Outlook

TWO - THE BUDGET OUTLOOK
 
    The Deficit Outlook
    Revenue and Spending Projections
    Changes Resulting from the Reconciliation Legislation
    Other Changes in the Budget Outlook Since March
    The Federal Sector of the National Income and Product Accounts
 
APPENDIXES

    A.  Evaluating CBO's Record of Economic Forecasts

    B.  Changes in Calculating the Consumer Price Indexes

    C.  Sequestration Update Report for Fiscal Year 1998

    D. Major Contributors to the Revenue and Spending Projections

TABLES
 
S-1. Changes in CBO's Projections Since March 1997
S-2. The Budget Outlook Through 2007
S-3. Economic Projections for Calendar Years 1997 Through 2007

1. The CBO Forecast for 1997 and 1998
2. Measures of Fiscal Policy Under Baseline Assumptions
3. Comparison of Forecasts for 1997 and 1998
4. Economic Projections for Calendar Years 1997 Through 2007
5. Economic Projections for Fiscal Years 1997 Through 2007
6. Comparison of Economic Projections, Calendar Years 1996-2007
7. The Deficit Outlook Under Current Policies
8. CBO Baseline Budget Projections, Assuming Compliance with Discretionary Spending Caps
9. CBO Baseline Projections for Mandatory Spending, Including Deposit Insurance
10. Changes in Revenues Resulting from Enactment of Reconciliation Legislation
11. Changes in Outlays Resulting from Enactment of Reconciliation Legislation
12. Changes in CBO's Baseline Deficit Projections Since March 1997
13. Relationship of the Budget to the Federal Sector of the National Income and Product Accounts
14. Projections of Baseline Receipts and Expenditures Measured by the National Income and Product Accounts

A-1. Comparison of CBO, Administration, and Blue Chip Forecasts of Two-Year Average Growth Rates for Real Output
A-2. Comparison of CBO, Administration, and Blue Chip Forecasts of Two-Year Average Inflation Rates in the Consumer Price Index
A-3. Comparison of CBO, Administration, and Blue Chip Forecasts of Two-Year Average Interest Rates on Three-Month Treasury Bills
A-4. Comparison of CBO, Administration, and Blue Chip Forecasts of Two-Year Average Long-Term Interest Rates
A-5. Comparison of CBO, Administration, and Blue Chip Forecasts of Two-Year Average Real Interest Rates on Three-Month Treasury Bills
A-6. Comparison of CBO and Administration Projections of the Two-Year Change in Wages and Salary Distributions Plus Book Profits as a Share of Output
A-7. Comparison of CBO and Administration Projections of Five-Year Average Growth Rates for Real Output
C-1. CBO Estimates of Discretionary Spending Limits for Fiscal Year 1997
C-2. CBO Estimates of Discretionary Spending Limits for Fiscal Years 1998-2002
C-3. Budgetary Effects of Direct Spending or Receipt Legislation Enacted Since the Budget Enforcement Act of 1990

FIGURES 

1. The Economic Forecast and Projection
2. Inflation and Tightening in the Product Market and Labor Market
3. Growth in Wages and Compensation in the Private Sector
4. Inflation in Imports, Computers, and Medical Care
5. The Personal Saving Rate
6. The Population That is 25 to 34 Years Old
7. Gross After-Tax Corporate Cash Flow as a Percentage of Potential Output
8. Interest Payments by Business as a Percentage of Cash Flow
9. New Orders for Nondefense Capital Goods and Investment in Producers' Durable Equipment
10. The U.S. Trade Deficit as a Percentage of GDP
11. The Standardized-Employment Deficit
12. The M2 and M3 Definitions of the Money Supply and Their Monitoring Ranges
13. Growth of Federal Revenues and GDP

BOXES
 
1. The Economic Effects of the Budget Reconciliation Package
2. The July 1997 Revisions to the National Income and Product Accounts
3. Variability of Growth in Revenues
4. Debt Subject to Limit
5. Exercise of Line-Item Veto Authority

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