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THE ECONOMIC AND BUDGET OUTLOOK:
AN UPDATE
 
 
August 1994
 
 
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 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 of this report may not add to totals because of rounding.

National income and product account data shown in the tables do not incorporate the July 29, 1994, revisions, which did not significantly affect the economic outlook. The discussion in Chapter 1 does, however, take account of the revisions.

 
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(f) of the Congressional Budget Act of 1974 for CBO to 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. Adrienne Kearney wrote the chapter, with contributions from Robert Arnold, Laurie Brown, Kim Kowalewski, Frank Russek, Jr., Matthew Salomon, and Christopher Williams. Matthew Salomon carried out the economic forecast and projections. Douglas Elmendorf, Victoria Farrell, Douglas Hamilton, Thomas Loo, Joyce Manchester, Angelo Mascaro, and John Sturrock provided comments and background analysis. Derek Briggs, Laurie Brown, Blake Mackey, John Romley, and Michael Simpson provided research assistance.

The baseline outlay projections were prepared by the staff of the Budget Analysis Division under the supervision of C.G. Nuckols, Paul N. Van de Water, Paul Cullinan, James Horney, Michael Miller, and Robert Sunshine. The revenue estimates were prepared by the staff of the Tax Analysis Division under the supervision of Rosemary Marcuss and Richard Kasten. Kathy A. Ruffing wrote Chapter 2 with contributions from Bryan Grote, Jeffrey Holland, and Richard Kasten. Matthew Salomon wrote Appendix A with Laurie Brown, and Robert Arnold wrote Appendix B. James Horney wrote the summary of the report.

An early version of the economic forecast underlying this report was discussed at a meeting of CBO's Panel of Economic Advisers. Members of this panel are Michael Boskin, Barry Bosworth, Robert Dederick, Martin Feldstein, Benjamin Friedman, Lyle E. Gramley, Robert Hall, Lawrence Klein, Robert Lawrence, John Makin, Burton Malkiel, Rudolph Penner, William Poole, Paul Samuelson, Charles Schultze, Robert Solow, James Tobin, Murray Weidenbaum, and Janet Yellen. Robert Gordon, Andrew Harless, James Medoff, Laurence Meyer, Michael Moran, and Edmund Phelps attended as guests. Although these outside advisers provided considerable assistance, this document does not necessarily reflect their views.

Paul L. Houts supervised the editing and production of the report, assisted by Sherry Snyder. Major portions were edited by Paul L. Houts, Sherry Snyder, Sherwood Kohn, and Christian Spoor, with the assistance of Leah Mazade. Laurie Brown prepared the graphics for Chapter 1 and Appendix B. Marion Curry, Dorothy Kornegay, Linda Lewis, and L. Rae Roy assisted in the preparation and production of the report. With the assistance of Martina Wojak-Piotrow, Kathryn Quattrone prepared the report for final publication.
 

Robert D. Reischauer
Director
August 1994
 
 

Contents

SUMMARY

ONE - THE ECONOMIC OUTLOOK

TWO - THE BUDGET OUTLOOK

APPENDIXES

A - Evaluating CBO's Record of Economic Forecasts
B - Reestimating the NAIRU
C - Major Contributors to the Revenue and Spending Projections
 
TABLES
 
S-1.  Short-Term Economic Forecasts for 1994 and 1995
S-2.  Medium-Term Economic Projections
S-3.  CBO Deficit Projections
S-4.  Changes in CBO Deficit Projections
1-1.  The CBO Forecast for 1994 and 1995
1-2.  The Fiscal Policy Outlook
1-3.  Medium-Term Economic Projections for Calendar Years 1994 Through 1999
1-4.  Medium-Term Economic Projections for Fiscal Years 1994 Through 1999
1-5.  Comparison of Congressional Budget Office, Administration, Federal Reserve, and Blue Chip Economic Forecasts
2-1.  CBO Baseline Deficit Projections
2-2.  Changes in CBO Baseline Deficit Projections
2-3.  CBO Baseline Budget Projections, Assuming Compliance with Discretionary Spending Caps
2-4.  CBO Baseline Projections for Mandatory Spending, Excluding Deposit Insurance
2-5.  Comparison of CBO Baseline with OMB Midsession Review
2-6.  Relationship of the Budget to the Federal Sector of the National Income and Product Accounts
2-7.  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 Interest Rates on Three-Month Treasury Bills Adjusted for Inflation
A-6.  Comparison of CBO and Administration Forecasts of Four-Year Average Growth Rates for Real Output
B-1.  Estimated Coefficients from Phillips Curve Regressions to Determine the NAIRU
 
FIGURES
 
S-1.  The Federal Deficit
1-1.  The Federal Funds Rate Signals a Period of Tighter Money
1-2.  The Economic Forecast and Projections
1-3.  Investment in Equipment Is Still Surging
1-4.  The Burden of Household Debt Repayment Is Shrinking
1-5.  Net Exports Move According to World and U.S. Output
1-6.  Mortgage Rates Have Turned Up
1-7.  Housing Is Still Affordable
1-8.  The Prices of Services Are Slow to Accelerate
1-9.  Putting Recent Dollar Weakness in Perspective
1-10.  Real Short-Term Interest Rates Are Still Low
1-11.  The Interest Rate Spread Usually Narrows Late in Expansions
1-12.  Potential GDP Governs the Projection of GDP
1-13.  The GDP Gap: GDP Typically Overshoots Its Mark
2-1.  Changes in CBO Deficit Projections, March 1993 to August 1994
B-1.  The Unemployment Rate, the Reestimated NAIRU, and the Old NAIRU
 
BOXES
 
1-1.  A New Measure of the Unemployment Rate
1-2.  Using the NAIRU to Forecast Inflation
2-1.  The Ten-Year Budget Outlook

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