Slow US recovery, unemployment to linger through ’14 - Congress

19 August 2010 19:58  [Source: ICIS news]

WASHINGTON (ICIS)--The US economic recovery will be modest and slow over the next several years, with high unemployment not expected to ease until the end of 2014, the Congressional Budget Office (CBO) said on Thursday.

The Congressional Budget Office, the analytical arm of Congress, said in its mid-year economic outlook that the federal government’s budget deficit this year will exceed $1,300bn (€1,014bn), the nation’s second-largest pool of red ink since World War II.

This year’s projected federal budget deficit would be equal to 9.1% of the nation’s $14,286bn gross domestic product (GDP) and would be second only to last year’s deficit, which was just shy of 10% of GDP, the office said.

Even after the economy recovers and returns to normal growth in 2014, the office predicts that budget deficits will continue through 2020 and raise the level of federal debt held by the public to 69% of GDP by that year.

That compares with public debt at the end of 2007 at only 36% of GDP, the CBO noted.

On the economy, the office said that it expects growth of only 2% from the fourth quarter of this year to the fourth quarter of 2011.

And, even as GDP growth is expected to accelerate after 2011, the CBO said it does not expect US unemployment to decline to near-normal rates of around 5% until the end of 2014.

“According to CBO’s projections, the recovery from the economic downturn will continue at a modest pace during the next few years,” the outlook said.

“Growth in the nation’s output since the middle of 2009 has been anaemic in comparison with that of previous recoveries following deep recessions, and the unemployment rate has remained quite high, averaging 9.7% in the first half of this year,” the report said.

“The considerable number of vacant houses and underused factories and offices will be a continuing drag on residential construction and business investment,” the CBO said, “and slow income growth as well as lost wealth will weigh on consumer spending.”

That is critical because consumer spending accounts for as much as 70% of all US economic activity and demand.

“All of those forces, along with the waning of federal fiscal support, will tend to restrain spending by individuals and businesses - and therefore economic growth” over the next few years, the report added.

The CBO also warned that economic headwinds facing the nation are likely to worsen in the out years.

“Beyond the 10-year budget window, the nation will face daunting long-term fiscal challenges posed by the aging of the population and rising costs for health care,” the CBO said, referring to the millions of so-called baby boomers who are now entering retirement years and increasing demand on taxpayer-funded Medicare spending.

Baby boomers are those born in the post-war years of 1946-1964.

“Continuing large deficits and the resulting increases in federal debt over time would reduce long-term economic growth,” the outlook warned.

“Putting the nation on a sustainable fiscal course will require policymakers to restrain the growth of spending substantially, raise revenues significantly ... or adopt some combination of those approaches,” the CBO concluded.

($1 = €0.78)

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