FOMC: More Bad News for Mid-Range Deficit Forecasts

by: James Bacon

Members of the Federal Open Market Committee are gloomier about the prospects for economic growth and unemployment over the next few years than they were in June. From our monomaniacal budget-deficit perspective, that implies that the job of taming the deficit has gotten that much harder.

The chart below compares the latest FOMC forecast to the economic assumptions used to prepare deficit projections in the Obama administration’s fiscal 2011 Mid-Session review. (I have consolidated the FOMC forecast, which provides a range of predictions prepared by individual members of the committee, into a composite number.)

(Click charts to enlarge)

Committee members are consistently less optimistic now than they (and the Obama team) were a half year ago. But the disparity widens from a crack to a chasm in 2013 and beyond. The divergence in growth rate expectations exceeds a full percentage point. If that chasm persists for the rest of the decade, it would be disastrous for the mid-term deficit outlook. For purposes of calculating the trajectory to Boomergeddon (when the U.S. government goes into default), it bears repeating that slower economic growth = weaker revenue growth = bigger-than-forecast deficits = bigger national debt = bigger interest payments on the national debt.

The gap in unemployment projections is relativelly trivial by comparison. High unemployment rates translate into higher spending on unemployment benefits, food stamps, Medicaid and other transfer payments for the poor and unemployed. If the FOMC is right and the Obamanauts are wrong, mandatory spending will likely stay slightly elevated longer than projected in the Obama budget forecast through 2013. It goes without saying, higher spending = bigger deficits = bigger national debt, etc.

Given the looming debate over spending and taxes, however, a marginally-worse-than-predicted unemployment forecast is the least of our worries. The economic growth rate — forecasts for which could continue to deteriorate — is what I’m focused on right now. The only painless way out of our budget dilemma is strong economic growth. Unfortunately, for reasons illuminated in my previous post (“Bernanke’s Raid on the Middle Class“) strong growth is not in the offing.

Disclosure: No positions