An Overview Of The Economic Outlook: 2021 To 2031

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An Overview of theEconomic Outlook:2021 to 2031The 2020–2021 coronavirus pandemiccaused severe economic disruptions lastyear as households, governments, and businesses adopted a variety of mandatory andvoluntary measures—collectively referred to here associal distancing—to limit in-person interactions thatcould spread the virus. The impact was focused onparticular sectors of the economy, such as travel andhospitality, and job losses were concentrated amonglower-wage workers.Over the course of the coming year, vaccination isexpected to greatly reduce the number of new cases ofCOVID-19, the disease caused by the coronavirus. Asa result, the extent of social distancing is expected todecline. In its new economic forecast, which covers theperiod from 2021 to 2031, the Congressional BudgetOffice therefore projects that the economic expansionthat began in mid-2020 will continue (see Table 1).Specifically, real (inflation-adjusted) gross domesticproduct (GDP) is projected to return to its prepandemiclevel in mid-2021 and to surpass its potential (that is,its maximum sustainable) level in early 2025. In CBO’sprojections, the unemployment rate gradually declinesthrough 2026, and the number of people employedreturns to its prepandemic level in 2024.CBO is using this economic forecast as the basis forupdating its budget projections for 2021 to 2031. Theagency plans to release those budget projections later inFebruary and a more detailed report about this forecastlater this winter. The forecast incorporates economic andother information available as of January 12, 2021, aswell as estimates of the economic effects of all legislation(including pandemic-related legislation) enacted up tothat date.FEBRUARY 2021The Economic Outlookfor 2021 to 2025In CBO’s projections, which incorporate the assumptions that current laws governing federal taxes andspending (as of January 12) generally remain in placeand that no significant additional emergency fundingor aid is provided, the economy continues to strengthenduring the next five years. Real GDP expands rapidly over the coming year,reaching its previous peak in mid-2021 and surpassingits potential level in early 2025. The annual growthof real GDP averages 2.6 percent during the five-yearperiod, exceeding the 1.9 percent growth rate of realpotential GDP (see Figure 1). Labor market conditions continue to improve. As theeconomy expands, many people rejoin the civilianlabor force who had left it during the pandemic,restoring it to its prepandemic size in 2022.1 Theunemployment rate gradually declines throughout theperiod, and the number of people employed returnsto its prepandemic level in 2024. Inflation, as measured by the price index for personalconsumption expenditures, rises gradually over thenext few years and rises above 2.0 percent after 2023,as the Federal Reserve maintains low interest ratesand continues to purchase long-term securities. Interest rates on federal borrowing rise. The FederalReserve maintains the federal funds rate (the rate thatfinancial institutions charge each other for overnightloans of their monetary reserves) near zero throughmid-2024 and then starts to raise that rate gradually.The interest rate on 3-month Treasury bills closely1. The labor force is the number of people age 16 or older in thecivilian noninstitutionalized population who have jobs or whoare available for work and are actively seeking jobs.Notes: Unless this report indicates otherwise, all years referred to are calendar years. Federal fiscal years run from October 1 to September 30 and aredesignated by the calendar year in which they end. Numbers in the text and tables may not add up to totals because of rounding.

2AN OVERVIEW OF THE ECONOMIC OUTLOOK: 2021 TO 2031February 2021Table 1 .CBO’s Economic Projections for Calendar Years 2021 to 2031Annual Average2020Gross Domestic ProductRealaNominalInflationPCE price indexCore PCE price indexbConsumer price indexcCore consumer price indexbGDP price indexEmployment Cost IndexdUnemployment RateGross Domestic ProductRealaNominalInflationPCE price indexCore PCE price indexbConsumer price indexcCore consumer price indexbGDP price indexEmployment Cost IndexdUnemployment Rate (Percent)Labor Force Participation Rate (Percent)gPayroll Employment (Monthly change, in thousands)hInterest Rates (Percent)Three-month Treasury billsTen-year Treasury notesTax Bases (Percentage of GDP)Wages and salariesDomestic corporate profitsiCurrent Account Balance (Percentage of GDP) k2021202220232024–20252026–2031Percentage Change From Fourth Quarter to Fourth 3.36.85.34.0e4.3fFourth-Quarter Level (Percent)4.94.6Percentage Change From Year to 8.161.7-7655.761.9521Annual Data sources: Congressional Budget Office; Bureau of Economic Analysis; Bureau of Labor Statistics; Federal Reserve. See www.cbo.gov/publication/56965#data.GDP gross domestic product; PCE personal consumption expenditures.a. Real values are nominal values that have been adjusted to remove the effects of changes in prices.b. Excludes prices for food and energy.c. The consumer price index for all urban consumers.d. The employment cost index for wages and salaries of workers in private industry.e. Value for the fourth quarter of 2025.f. Value for the fourth quarter of 2031.g. The labor force participation rate is the share of the civilian noninstitutionalized population age 16 or older that is working or actively seeking work.h. The average monthly change in the number of employees on nonfarm payrolls, calculated by dividing the change from the fourth quarter of one calendar yearto the fourth quarter of the next by 12.i. Adjusted to remove distortions in depreciation allowances caused by tax rules and to exclude the effects of changes in prices on the value of inventories.j. Estimated value for 2020.k. Represents net exports of goods and services, net capital income, and net transfer payments between the United States and the rest of the world.

February 2021AN OVERVIEW OF THE ECONOMIC OUTLOOK: 2021 TO 2031Figure 1 .The Relationship Between GDP and Potential GDPPercentage Change6ProjectedReal GDP Growth3Real PotentialGDP Growth0 32000200520102015202020252030Percentage of Potential GDP2Output Gap0In CBO’s projections,the annual growth ofreal (inflation-adjusted)GDP exceeds that of realpotential GDP until 2026and then falls below it. Theoutput gap between realGDP and real potential GDPis positive for several years,starting in 2025, beforemoving back toward itshistorical average. 2 4 62000200520102015202020252030Data sources: Congressional Budget Office; Bureau of Economic Analysis. See www.cbo.gov/publication/56965#data.Real values are nominal values that have been adjusted to remove the effects of changes in prices. Potential GDP is CBO’s estimate of the maximum sustainableoutput of the economy. Growth of real GDP and of real potential GDP is measured from the fourth quarter of one calendar year to the fourth quarter of the next.The output gap is the difference between GDP and potential GDP, expressed as a percentage of potential GDP. A positive value indicates that GDP exceedspotential GDP; a negative value indicates that GDP falls short of potential GDP. Values for the output gap are for the fourth quarter of each year.The shaded vertical bars indicate periods of recession, which extend from the peak of a business cycle to its trough. The National Bureau of Economic Research(NBER) has determined that an expansion ended and a recession began in February 2020. Although the NBER has not yet identified the end of that recession,CBO estimates that it ended in the second quarter of 2020.GDP gross domestic product.3

4AN OVERVIEW OF THE ECONOMIC OUTLOOK: 2021 TO 2031follows the federal funds rate. The interest rate on10-year Treasury notes rises gradually as the FederalReserve reduces the pace of its asset purchases andinvestors anticipate rising short-term interest rateslater in the decade.CBO’s projections of economic growth have beenboosted by various laws enacted in 2020.2 Most recently,in late December, the Consolidated Appropriations Act,2021 (Public Law 116-260), appropriated funds forthe remainder of fiscal year 2021, provided additionalemergency funding for federal agencies to respond to thepublic health emergency created by the pandemic, andprovided financial support to households, businesses,and nonfederal governments affected by the economicdownturn, among other measures. CBO estimates thatthe pandemic-related provisions in that legislation willadd 774 billion to the deficit in fiscal year 2021 and 98 billion in 2022.3 Those provisions will boost thelevel of real GDP by 1.5 percent, on average, in calendaryears 2021 and 2022, CBO estimates; the bulk of theimpact will occur in 2021.The Economic Outlookfor 2026 to 2031In CBO’s projections, the economy continues to expandfrom 2026 to 2031. Real GDP grows by 1.6 percentper year, on average (see Table 2). Real potential GDPgrows slightly more rapidly (see Table 3). For most of theperiod, the Federal Reserve allows inflation to remainabove its target level; the level of real GDP likewiseremains above the level of real potential GDP for severalyears. Eventually, less accommodative policies on the partof the Federal Reserve help push GDP back toward itshistorical average relationship with potential GDP.A mild increase in productivity growth causes potential output in CBO’s projections to grow more quicklyover the 2021–2031 period than it has grown since the2007–2009 recession. However, potential output stillgrows more slowly than it has grown since 1950, mainly2. See Congressional Budget Office, The Effects of PandemicRelated Legislation on Output (September 2020), www.cbo.gov/publication/56537.3. Those provisions are contained in divisions M, N, and EE of theConsolidated Appropriations Act, 2021.February 2021because of an ongoing, long-term slowdown in thegrowth of the labor force.Uncertainties in theEconomic OutlookCBO’s projections reflect an average of possible outcomes under current law. But these projections aresubject to an unusually high degree of uncertainty, andthat uncertainty stems from many sources, including thecourse of the pandemic, the effectiveness of monetaryand fiscal policies, and the response of global financialmarkets to substantial increases in public deficits anddebt. As a result, the economy could expand substantiallymore quickly or more slowly than CBO projects. Labormarket conditions could likewise improve more quicklyor slowly than projected, and inflation and interest ratescould rise more rapidly or slowly as well. Also uncertainis the impact of the pandemic on the economy over thelonger term, including its effects on productivity, thelabor force, and technological innovation.Comparisons WithPrevious ProjectionsCBO currently projects a stronger economy than it didin July 2020, in large part because the downturn wasnot as severe as expected and because the first stage ofthe recovery took place sooner and was stronger thanexpected (see Table 4 on page 7).4 GDP and employment are projected to be higher and to be accompanied by modestly higher inflation and higher interestrates than they were in CBO’s July projections. Thefact that the downturn was less severe and the recoverystronger than previously projected also changed theprojected pattern of growth: CBO’s current projections of GDP growth are stronger, on average, for the2021–2025 period than they were in July but weaker forthe 2026–2031 period.CBO made those changes to its economic projectionseven though it expects social distancing to be more pronounced and to last longer than projected in July. Theprojected effects of the Consolidated Appropriations Act,2021, played a part in improving the economic outlook. 4. For the July projections, see Congressional Budget Office,An Update to the Economic Outlook: 2020 to 2030 (July 2020),www.cbo.gov/publication/56442.

February 2021AN OVERVIEW OF THE ECONOMIC OUTLOOK: 2021 TO 2031Table 2 .The Projected Growth of Real GDP and Its ComponentsPercentAnnual Average2020Real GDPComponents of Real GDPConsumer spendingaBusiness investmentbBusiness fixed investmentcResidential investmentdPurchases by federal, state, and local governmentseFederalState and –2031Percentage Change From Fourth Quarter to Fourth Contributions to the Growth of Real GDP (Percentage points)Components of Real GDPConsumer spendingaBusiness investmentbBusiness fixed investmentcResidential investmentdPurchases by federal, state, and local governmentseFederalState and .2-0.41.30.30.3*0.1*0.10.2-0.3Data source: Congressional Budget Office. See www.cbo.gov/publication/56965#data.Real values are nominal values that have been adjusted to remove the effects of changes in prices.GDP gross domestic product; * between zero and 0.05 percentage points.a. Consists of personal consumption expenditures.b. Comprises business fixed investment and investment in inventories.c. Consists of purchases of equipment, nonresidential structures, and intellectual property products.d. Includes the construction of single-family and multifamily structures, manufactured homes, and dormitories; spending on home improvements; and brokers’commissions and other ownership transfer costs.e. Based on the national income and product accounts.5

6AN OVERVIEW OF THE ECONOMIC OUTLOOK: 2021 TO 2031February 2021Table 3 .Key Inputs in CBO’s Projections of Real Potential GDPPercentAverage Annual GrowthProjected AverageAnnual GrowthTotal,1950– 1974– 1982– 1991– 2002– 2008– 1950–1973 1981 1990 2001 2007 2020 2020Total,2021– 2026– 2021–2025 2031 2031Real Potential GDPPotential Labor ForcePotential Labor Force Productivity a4.01.62.33.22.50.73.21.61.63.21.22.0Overall Economy2.41.73.11.00.51.41.41.21.7Real Potential OutputPotential Hours WorkedCapital Services bPotential Total Factor .71.23.91.6Nonfarm Business tions to the Growth of Real Potential Output(Percentage points)Potential hours workedCapital inputPotential total factor productivityTotal 0.71.12.10.20.71.12.00.20.71.12.1Potential Labor 2.21.1Data source: Congressional Budget Office. See www.cbo.gov/publication/56965#data.Real values are nominal values that have been adjusted to remove the effects of changes in prices. Potential GDP is CBO’s estimate of the maximum sustainableoutput of the economy.The table shows compound annual growth rates over the specified periods. Those rates are calculated from the fourth quarter of the year immediately precedingeach period to the fourth quarter at the end of that period.GDP gross domestic product.a. The ratio of potential GDP to the potential labor force.b. The services provided by capital goods (such as computers and other equipment) that constitute the actual input in the production process.c. The average real output per unit of combined labor and capital services, excluding the effects of business cycles.d. The ratio of potential output to potential hours worked in the nonfarm business sector.

February 2021AN OVERVIEW OF THE ECONOMIC OUTLOOK: 2021 TO 2031Table 4 .CBO’s Current and Previous Economic Projections for Calendar Years 2020 to 2030Annual 0–2030Percentage Change From Fourth Quarter to Fourth QuarterReal GDPaFebruary 2021July 2020Nominal GDPFebruary 2021July 2020PCE Price IndexFebruary 2021July 2020Core PCE Price Index bFebruary 2021July 2020Consumer Price IndexcFebruary 2021July 2020Core Consumer Price IndexbFebruary 2021July 2020GDP Price IndexFebruary 2021July 2020Employment Cost IndexdFebruary 2021July 2020Real Potential GDPaFebruary 2021July .61.91.51.91.81.91.71.71.81.81.8ContinuedCBO has corrected this page since the report was originally published. Corrections are listed at the end of the report.7

8AN OVERVIEW OF THE ECONOMIC OUTLOOK: 2021 TO 2031February 2021Table 4.ContinuedCBO’s Current and Previous Economic Projections for Calendar Years 2020 to 2030Annual 0–2030Annual AverageUnemployment Rate (Percent)February 2021July 2020Interest Rates (Percent)Three-month Treasury billsFebruary 2021July 2020Ten-year Treasury notesFebruary 2021July 2020Tax Bases (Percentage of GDP)Wages and salariesFebruary 2021July 2020Domestic corporate profits eFebruary 2021July ta sources: Congressional Budget Office; Bureau of Labor Statistics; Federal Reserve. See www.cbo.gov/publication/56965#data.GDP gross domestic product; PCE personal consumption expenditures.a. Real values are nominal values that have been adjusted to remove the effects of changes in prices.b. Excludes prices for food and energy.c. The consumer price index for all urban consumers.d. The employment cost index for wages and salaries of workers in private industry.e. Adjusted to remove distortions in depreciation allowances caused by tax rules and to exclude the effects of changes in prices on the value of inventories.f. Estimated value for 2020.CBO has corrected this page since the report was originally published. Corrections are listed at the end of the report.

February 2021AN OVERVIEW OF THE ECONOMIC OUTLOOK: 2021 TO 2031This document is one of a series of reports on the state of the economy that the Congressional Budget Officeissues each year. In keeping with CBO’s mandate to provide objective, impartial analysis, this report makes norecommendations.CBO consulted with members of its Panel of Economic Advisers during the development of this report.Although those advisers provided considerable assistance, they are not responsible for the contents of this report.Robert Shackleton wrote the report. Leigh Angres, Christina Hawley Anthony, Sebastien Gay, Theresa Gullo,Deborah Kilroe, John McClelland, and Mia Williams provided helpful comments. The economic forecast andrelated estimates were prepared by Aaron Betz, Yiqun Gloria Chen, Erin Deal, Daniel Fried, Edward Gamber,Ronald Gecan, Mark Lasky, Junghoon Lee, Michael McGrane, Jaeger Nelson, Sarah Robinson, Jeffrey Schafer,John Seliski, Robert Shackleton, and Christopher Williams. Many other analysts at CBO contributed information about the pandemic and the effects of actions taken in response to it. Erin Deal and Sarah Robinsonfact-checked the report. The writing of the report and the preparation of the forecast were supervised byJeffrey Werling, John Kitc

Economic Outlook: 2021 to 2031 T he 2020–2021 coronavirus pandemic caused severe economic disruptions last year as households, governments, and busi-nesses adopted a variety of mandatory and voluntary measures—collectively referred to here as social distancing—to limit in-person interactions that could spread the virus.

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