Tuesday, July 16, 2024
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June CBO Economic Outlook: Output Gap to be Positive through 2025

by xyonent
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Gdppix Jun24b.png

The CBO Latest economic outlook Yesterday. PCE inflation forecasts are high, as are budget deficits. Fed funds rate to fall for the first time in Q1 2025. Most interesting to me are the GDP forecasts, including potential GDP.

GDP forecasts as of June and February are as follows:

Figure 1: Reported GDP (bold black), February CBO (red), June CBO (blue), FT-Booth median (dark red triangle), GDPNow as of June 18 (light blue square), all in billions of SAAR 2017 Croatian dollars. Source: BEA (2024 Q1 2nd Edition, CBO February Budget and Economic Outlook, CBO June Economic Outlook UpdateJune Booth Macroeconomist Survey, Atlanta Fed.

The CBO forecast is based on data available as of May 2. The latest CBO forecast is significantly higher than its February forecast (see discussion here).) is largely due to an intervening upside to the GDP forecast. It is currently in line with the FT-Booth June median forecast and slightly below the Atlanta Fed’s Q2 nowcast (slightly above the median forecast in the May survey of professional forecasters).

The revised quarter-over-quarter growth forecast, while higher in the near term compared to the February forecast (based on data available as of January 6), suggests a slowdown and return to potential growth by the end of 2025. That said, CBO’s current implicit output gap forecast differs significantly from that reported in the February Economic Outlook. [Update: As suggested by Paweł Skrzypczyński, the implied output gap is even larger using SEP and CBO potential. However, we don’t know what the FOMC’s view on potential GDP is, although the Green Book must have an estimate.]

Figure 2 [updated 1pm CT]: Log output gap, % (bold black), February CBO forecast (red), June CBO forecast (blue), FOMC June summary economic projections (inverted light green triangles). Reporting is based on reported GDP and June CBO estimated potential GDP. Sources: BEA (Q2 2024 release, CBO February Budget and Economic Outlook, CBO June Economic Outlook Update, Federal Reserveand authors’ calculations.

This means that under current law, CBO projects a positive output gap over the next year and a half.For reference, the peak pre-pandemic output gap was 0.9 percentage points, while the highest in recent years was 2.4 percentage points in the second quarter of 2000.

Interestingly, CBO’s projections are based on the assumption that the Fed will begin cutting the federal funds rate for the first time in the first quarter of 2025. This contrasts with its February projections, which predicted roughly 60 bps (on average) of rate cuts by the end of 2024.

Figure 3: Federal funds rate (bold black), CBO February forecast (red), CBO June forecast (blue), all percentages, period averages. Source: Board of Governors of the Federal Reserve System, CBO February Budget and Economic Outlook, CBO June Economic Outlook Update.

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