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Unless otherwise indicated, all years referred to in this report are calendar years. Unemployment rates throughout the report are calculated on the basis of the civilian labor force. Details in the text and tables of this report may not add to totals because of rounding. Figures showing periods of recession (indicated by a shaded area) reflect the peak (P) and trough (T) of the recession. The Balanced Budget and Emergency Deficit Control Act of 1985 (popularly known as Gramm-Rudman-Hollings) is also referred to in this volume more briefly as the Balanced Budget Act. |
This volume is one of a series of reports on the state of the economy and the budget issued periodically by the Congressional Budget Office (CBO). Chapter III constitutes the report required by Section 2905(a) of the Deficit Reduction Act of 1984 (Public Law 98-369). In accordance with CBO's mandate to provide objective analysis, the report contains no recommendations.
Chapter I of this report was prepared by the Fiscal Analysis Division under the direction of Jacob S. Dreyer, with the assistance of Robert Dennis, George Iden, and John F. Peterson. Important contributions were made by Trevor Alleyne, Katherine Barnum, James Barth, John Canally, Jr., Suzanne Cooper, Victoria S. Farrell, Douglas R. Hamilton, James Kiefer, Daniel Laufenberg, Frank S. Russek, Jr., John Sabelhaus, Matthew A. Salomon, Scott Schuh, John R. Sturrock, Eng Meng Tan, Stephan S. Thurman, and Bragi Valgeirsson.
The outlay projections were prepared by the staff of the Budget Analysis Division, under the supervision of James L. Blum, C.G. Nuckols, Michael A. Miller, Charles E. Seagrave, Robert A. Sunshine, and Paul N. Van de Water. The revenue estimates were prepared by the staff of the Tax Analysis Division, under the supervision of Rosemary D. Marcuss and Kathleen M. O'Connell, with important contributions by Mark Booth, Rick Kasten, Jeffrey Miller, Marianne Page, Linda Radey, and Frank Sammartino.
Chapter II was written by Kathy A. Ruffing, with contributions by David Bashore, Paul Christy, Carmela Dyer, Andrew Haughwout, Richard Krop, and Mark Weatherly. Chapter III was written by Paul N. Van de Water and Matthew A. Salomon, with the assistance of Suzanne Cooper.
Paul L. Houts supervised the editing and production of this report,
assisted by Nancy H. Brooks. Major portions were edited by Francis S. Pierce
and Sherry Snyder. Debra M. Blagburn coordinated the preparation of the
report. The authors owe special thanks to Linda Brockman, Marion Curry,
Bonnie Fowler, Janice Johnson, Thelma L. Jones, Dorothy J. Kornegay, and
L. Rae Roy, who typed the many drafts.
Edward M. Gramlich
Acting Director
August 1987
SUMMARY
I - THE ECONOMIC OUTLOOK
II - THE BUDGET OUTLOOK
III - UNCERTAINTY AND BIAS IN BUDGET PROJECTIONS
APPENDIXES
A - Sources for Analyzing Economic and Budget Errors
B - Estimates of Potential Output
C - Historical Estimates of Potential GNP, NAIRU, and the Standardized-Employment
Deficit
| TABLES | |
| S-l. | Effect of Tax Reform and One-Time Outlay Savings on the Deficit |
| S-2. | Changes in Baseline Deficit Projections Since February |
| S-3. | Policy Changes in the Fiscal Year 1988 Budget Resolution as Estimated by CBO |
| S-4. | The CBO Forecast for 1987 and 1988 |
| S-5. | Comparison of CBO Winter and Summer Economic Projections |
| I-1. | Measures of Fiscal Policy |
| I-2. | Nominal Wage and Compensation Rates in the Nonfarm Business Sector |
| I-3. | Current Indicators of Business Fixed Investment and Surveys of Capital Spending Plans for 1987 |
| I-4. | Housing |
| I-5. | Government Purchases of Goods and Services |
| I-6. | The CBO Forecast for 1987 and 1988 |
| I-7. | Medium-Term Economic Projections for Calendar Years 1989-1992 |
| I-8. | Medium-Term Economic Projections for Fiscal Years 1989-1992 |
| II-1. | The Outlook for Fiscal Years 1987 and 1988 |
| II-2. | Differences Among CBO Baseline, Base for Sequestration, and Budget Resolution for Fiscal Year 1988 |
| II-3. | CBO Baseline Projections of Revenues, Outlays, and Deficits |
| II-4. | Updated CBO Baseline Projections for Fiscal Years 1987 Through 1992 |
| II-5. | Effect of the Tax Reform Act of 1986 on CBO Revenue Projections |
| II-6. | Changes in CBO Baseline Projections Since February 1987 |
| II-7. | Effect of Tax Reform and One-Time Outlay Savings on the Deficit |
| II-8. | Policy Changes in the Fiscal Year 1988 Budget Resolution as Estimated by CBO |
| II-9. | Preliminary Reestimates of the Congressional Budget Resolution |
| II-10. | Projections of CBO Baseline Receipts and Expenditures on a National Income and Product Accounts Basis |
| II-11. | Relationship of the CBO Baseline to the Federal Sector of the National Income and Product Accounts |
| III-l. | Sources of Differences Between Actual Budget Totals and First Budget Resolution Estimate for Fiscal Years 1980-1987 |
| III-2. | Policy Differences Between Actual Budget Totals and First Budget Resolution Estimates for Fiscal Years 1980-1987 |
| III-3. | Economic Differences Between Actual Budget Totals and First Budget Resolution Estimates for Fiscal Years 1980-1987 |
| III-4. | Equations Relating Economic Differences Between Actual and Estimated Revenues to Differences Between Actual and Assumed Gross National Product |
| III-5. | Budget Year GNP Forecasts and Errors |
| III-6. | Technical Differences Between Actual Budget Totals and First Budget Resolution Estimates for Fiscal Years 1980-1987 |
| A-l. | Congressional Budget Resolutions and Actual Budget Totals |
| A-2. | Data Sources for the Institutional Forecast Comparison |
| FIGURES | |
| S-l. | Deficit Adjusted for Tax Reform Act and One-Time Savings |
| S-2. | Major Economic Assumptions |
| I-1. | Standardized-Employment Deficit |
| I-2. | The Exchange Rate and Relative Interest Rates |
| I-3. | Recent Movements of Short- and Long-Term Interest Rates |
| I-4. | M2 Growth and Targets |
| I-5. | Productivity Growth |
| I-6. | Private Nonfarm Employment |
| I-7. | Measures of Inflation |
| I-8. | Foreign and U.S. Import Prices |
| I-9. | Private Nonfarm Wage Rates |
| I-10. | Business Fixed Investment Indicators |
| I-11. | Capacity Utilization |
| I-12. | Saving and Debt Measures |
| I-13. | Vacancy Rate for Rental Units |
| I-14. | Real Trade Balance |
| III-l. | Sources of Error in Deficit Estimates, Fiscal Years 1980-1987 |
| III-2. | Budget Resolution and Actual Deficits |
| III-3. | Farm Price Support Outlays |
| III-4. | Uncertainty of Fiscal Year 1988 GNP Forecast |
| B-l. | The Effect of Demographics on the Unemployment Rate |
| B-2. | Real Gross Domestic Product |
| BOXES | |
| I-1. | Troubled Financial Institutions |
| I-2. | Labor Markets, Inflation, and NAIRU |
| II-1. | The Federal Employees' Thrift Plan and the Budget |
Moderate economic growth--spurred mainly by an improvement in foreign trade--is likely to continue, according to the latest Congressional Budget Office (CBO) projections. But the growth rate is slightly lower than previously projected. Also, the outlook now shows higher consumer price inflation and interest rates than were foreseen in the winter. This change in economic assumptions has increased the projected budget deficits for 1988 through 1992.
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