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The Economic and Budget Outlook: An Update is one of a series of reports on the state of the economy and the budget issued periodically by the Congressional Budget Office (CBO). In accordance with CBO's mandate to provide objective analysis, the report contains no recommendations.

The report was prepared by George R. Iden, Frederick Ribe, Frank S. Russek, Jr., Stephen H. Zeller, Robert A. Dennis, Peter M. Taylor, Christopher D. Kask, Stephan Thurman, John Hilley, John Sturrock, Martin Regalia, John W. Straka, Naif A. Khouri, Debra Holt, Peter Woodward, Lucia Foster, and Louis Haskell, under the direction of William J. Beeman. Chapter V was prepared by CBO's Budget Analysis Division under the direction of James L. Blum with the assistance of Paul Van de Water, and by the Tax Analysis Division. Francis S. Pierce edited the manuscript, assisted by Nancy H. Brooks. Graphic illustrations were prepared by Andy Hemstreet. Debra M. Blagburn, Mechita O. Crawford, Dorothy J. Kornegay, and Thelma Jones typed the many drafts.
 

Alice M. Rivlin
Director
August 1983
 
 

CHAPTER I. SUMMARY AND INTRODUCTION

• Recent Economic Developments
• The CBO Economic Forecast
• Conclusion

CHAPTER II. THE BEGINNING OF ECONOMIC RECOVERY

• The Upturn in Production
• Prices, Interest Rates, and Exchange Rates
• Sources of Prospective Growth in Demand

CHAPTER III MONETARY AND FISCAL POLICY

• Fiscal Policy
• Monetary Policy and Financial Conditions
• Conclusion

CHAPTER IV. THE ECONOMIC OUTLOOK

• The CBO Economic Forecast
• The Economic Projections Through 1986

CHAPTER V. THE BUDGET OUTLOOK

• The Congressional Budget Plan
• CBO Budget Reestimates
• Major Uncertainties in the Budget Outlook

APPENDIX. BASELINE BUDGET PROJECTIONS
 

TABLES
1.	RECENT ECONOMIC INDICATORS
2.	THE CBO SHORT-RUN FORECAST
3.	SUMMARY COMPARISON OF ECONOMIC ASSUMPTIONS
4.	CBO UNIFIED BUDGET PROJECTIONS GIVEN POLICIES OF BUDGET RESOLUTION FOR 1984
5.	THE STANDARDIZED-EMPLOYMENT DEFICIT
6.	QUARTERLY INDICATORS OF ECONOMIC ACTIVITY
7.	STAGES OF RECESSION AND RECOVERY: CHANGES IN THE COMPONENTS OF REAL GROSS NATIONAL PRODUCT
8.	MEASURES OF WAGE AND COMPENSATION CHANGE FOR NONFARM BUSINESS SECTOR
9.	INFLATION AND UNEMPLOYMENT RATES IN THE UNITED STATES AND SEVEN OTHER MAJOR INDUSTRIAL COUNTRIES THROUGH THE FIRST QUARTER OF 1983
10.	VELOCITY GROWTH FOLLOWING CYCLICAL TROUGHS
11.	UNIFIED BUDGET DEFICITS
12.	STANDARDIZED-EMPLOYMENT DEFICITS
13.	THE CBO FORECAST FOR 1983 AND 1984
14.	COMPARISON OF ECONOMIC OUTLOOKS
15.	THE BUDGET OUTLOOK WITH POLICIES OF THE FIRST BUDGET RESOLUTION FOR FISCAL YEAR 1984
16.	TRENDS IN REVENUES AND OUTLAYS
17.	CBO PROJECTIONS OF REVENUES BY SOURCE
18.	BUDGET RESOLUTION RECONCILIATION INSTRUCTIONS
19.	BUDGET RESOLUTION RESERVE FOR NEW INITIATIVES IN DOMESTIC PRO GRAMS
20.	CBO PROJECTIONS OF OUTLAYS BY MAJOR SPENDING CATEGORIES
21.	BUDGET FINANCING AND DEBT OUTSTANDING
22.	THE EFFECT ON BUDGET DEFICITS OF ONE-PERCENTAGE-POINT HIGHER INTEREST RATES
23.	CBO REESTIMATES OF THE FIRST BUDGET RESOLUTION
24.	CBO REESTIMATES OF THE 1984 BUDGET RESOLUTION ATTRIBUTABLE TO REVISED ECONOMIC ASSUMPTIONS
25.	CBO REESTIMATES OF THE 1984 BUDGET RESOLUTION ATTRIBUTABLE TO CONGRESSIONAL ACTION
26.	CBO REESTIMATES OF THE 1984 BUDGET RESOLUTION ATTRIBUTABLE TO REVISED TECHNICAL ASSUMPTIONS
27.	THE BUDGET OUTLOOK UNDER ADMINISTRATION POLICIES
28.	COMPARISON OF MAJOR BUDGET CHANGES PROPOSED BY THE CONGRESS AND THE PRESIDENT
29.	IMPACT ON 1984 BUDGET RESOLUTION DEFICIT TARGETS FOR 1984-1986 OF NO ACTION ON RECONCILIATION INSTRUCTIONS AND RESERVE FUND AUTHORIZATIONS
FIGURES
1.	POSTWAR INFLATION AND UNEMPLOYMENT
2.	SHORT-TERM INTEREST RATES
3.	FEDERAL DEFICIT AS A PERCENT OF GROSS SAVINGS
4.	FEDERAL DEFICITS AS A PERCENTAGE OF GROSS NATIONAL PRODUCT
5.	INDICATORS OF ECONOMIC ACTIVITY
6.	CHANGES IN REAL INVENTORIES IN POSTWAR RECESSIONS
7.	PRICES AND INTEREST RATES
8.	EURODOLLAR INTEREST DIFFERENTIALS
9.	SOURCES OF DEMAND: RECENT MOVEMENTS
10.	HOUSEHOLD NET WORTH
11.	SOURCES OF CONSUMER CONFIDENCE
12.	HOUSE PAYMENTS AND HOUSES SOLD
13.	BUSINESS FAILURE RATE
14.	DETERMINANTS OF NET EXPORTS
15.	MONETARY TARGETS AND SELECTED INTEREST RATES
16.	GROWTH IN VELOCITY OF MONEY AGGREGATES
17.	DEVIATIONS FROM TREND OF VELOCITY OF MONEY AGGREGATES
18.	SELECTED INTEREST RATE MEASURES
19.	STANDARDIZED BUDGET DEFICIT AS A PERCENTAGE OF STANDARDIZED GROSS NATIONAL PRODUCT
20.	CHANGE IN NET FOREIGN ASSETS IN THE UNITED STATES
21.	MONETIZATION OF THE DEBT
22.	PUBLICLY HELD FEDERAL DEBT AS A PERCENT OF GROSS NATIONAL PRODUCT
23.	CBO ECONOMIC PROJECTIONS
24.	MAJOR BUDGET POLICY DIFFERENCES
BOXES
1.	THE ECONOMY AT MID-1983
2.	RECENT MAJOR COLLECTIVE BARGAINING AGREEMENTS
3.	THE MAKEUP OF THE TRADE DECLINE
4.	WILL THE FEDERAL DEBT OUTRUN THE ECONOMY?

 

The purpose of this report is to update the economic and budget projections of the Congressional Budget Office (CBO) to reflect economic developments of the last six months and recent Congressional actions.

Last winter CBO projected an immediate resumption of economic growth and further gradual improvement in inflation. Despite the depth of the recession, the recovery was expected to be weaker than the average cyclical recovery, largely because of persistently high interest rates. As it turned out, interest rates were higher than anticipated while both unemployment and inflation abated more than expected. Although the economy was even weaker than projected in the first months of the recovery, it scored very large gains in employment, sales, and output in the second quarter. Given the momentum now building in the economy, CBO's updated forecast shows significantly more economic growth during the first year of recovery than anticipated last February. Nevertheless, this recovery looks to be quite precarious, largely because of high interest rates and uncertainty surrounding the future course of monetary and fiscal policy.

The First Concurrent Resolution on the Budget for Fiscal Year 1984 calls for policies that would slow the growth of spending, raise additional taxes, and reduce the growth of structural deficits. According to CBO's budget projections, the resolution's policies in the context of the stronger recovery now in prospect would result in declining deficits in the 1984-1986 period--a turnaround from CBO's projection of rising deficits based on the policies and forecasts of last February. Nevertheless, budget deficits would still remain very high by historical standards, partly because those policies would have little effect on the deficit until after 1984. In fact, the structural element in the deficit would not begin to decline until 1986, suggesting continued pressure on interest rates with attendant adverse effects on interest-sensitive sectors of the economy.

The CBO projections assume that the budget resolution will be implemented, but passage of the budget resolution is only the first step in enacting and implementing specific measures to reduce deficits. Unless Congress and the Administration act to carry out these or similar policies, the outlook is for budget deficits on the order of $200 billion for years to come.

Deficits will also remain very high if economic growth proves weaker than anticipated. While underlying demand is strong, the recovery may not be sustained if inflation and interest rates rise to high levels once again. Projecting inflation and interest rates is difficult especially in view of the uncertainty surrounding the budget, monetary policy, and the foreign debt situation in developing countries. And even small differences in estimated inflation and interest rates can have sizable effects on projections of outlays, revenues, and the deficit.

Many private forecasts are based on the assumption that the deficit-reduction measures of the budget resolution will not be enacted. Such forecasts generally show higher deficits, higher interest rates, and less strength in interest-sensitive sectors than CBO's projection. In addition, money growth has been so rapid that some economists expect Federal Reserve policy to become considerably more restrictive in the months ahead in order to prevent the possible return of high rates of inflation. CBO's economic projection does not presume a substantial further rise in rates from the levels that prevailed in early August.

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