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The Congressional Budget Office (CBO) just released its forecast for economic growth and what it sees seems to differ substantially from what the Federal Reserve sees.

The CBO forecast places economic growth (real GDP growth) for the United States at 2.0 percent this year and at 1.1 percent in 2013.

The Federal Reserve just released its projections last week. Taking the average of the ranges given, the Fed is forecasting that economic growth in 2012 will be 2.5 percent, and, for 2013 will be 3.0 percent.

Hey, these forecasts are going in opposite directions!

The one forecast, that of the CBO, emphasizes the future of the federal deficit:

“The deficit will be $1.1 trillion in the current fiscal year, about $200 billion less than in 2011, and will fall sharply in the next three years as a result of tax increases and spending cuts required by existing law…”

The other forecast, that of the Federal Reserve, emphasizes the future of interest rates: short-term interest rates will remain close to zero until well into 2014.

In one sense, it seems as if the consequences of the two forecast are backward. In order for the deficit to decline, the economy needs to be growing so that tax revenues will increase and welfare payments will decrease. This will not happen if economic growth slows and unemployment increases…as it does in the CBO projection. (See a strong argument on this point in the WSJ here.)

The Federal Reserve, on the other hand, has short-term interest rates staying extremely low despite the fact that they predict rising rates of economic growth, a condition that usually produces higher levels of interest rates. This is because the demand for money generally increases with the rising level of incomes produced by the economic growth.

The major point is, however, that the CBO has produced a pretty dismal economic forecast.

The CBO projection has unemployment rates rising to 8.9 percent in the last quarter of this year, up from 8.5 percent in December 2011. Furthermore, the unemployment rate is expected to rise to 9.2 percent in the final quarter of 2013.

This is not good!

And, what happens to the amount of under-employment if the CBO forecast takes place? We certainly would see the under-employment rate stay in the 20 to 25 percent range.

On top of this is the real threat of recession in Europe. The question is, how much does a European recession play into the forecasts of the Congressional Budget Office?

My big fear has been that a recession in Europe will have very negative connotations for growth in the United States. (See my post, Issue Number 1 for 2012: Recession in Europe.)

Data released yesterday and presented by the Financial Times indicates that the unemployment rate for the eurozone was at 10.4 percent at the end of 2011 for the whole workforce, and was at 21.3 percent for the category “youth.” Furthermore, the consensus real GDP growth for the eurozone is at negative 0.3 percent, not a level that is conducive to the reduction in the unemployment rate.

The unemployment rate ranges from 22.9 percent in Spain and 19.2 percent in Greece to 5.5 percent in Germany and 4.1 percent in Austria showing the split that exists within the eurozone, itself. (See Eurozone Jobless Rate at Euro-era High, and Contraction Threat Clouds Euro Zone.)

How much impact will this “European Recession” have on the economy of the United States and has it really been taken into account by the forecasters of the CBO and the Federal Reserve System?

And, given the over-extended position of consumers, corporations, and banks, where might a pickup in spending take place?

Given these facts, I tend to agree more with the economic projections of the Congressional Budget Office than I do with those of the Federal Reserve. However, if we do achieve the growth rates of the Congressional Budget Office it would seem that the cumulative federal deficit for the next five years would be closer to the cumulative federal budget deficit of the past five years -- in excess of $6 trillion, more than what is now being forecast.

In essence, we are going nowhere ... fast!

Source: Economic Growth? What Economic Growth?