CBO: Economy likely to stay below potential for years

The Congressional Budget Office released its Budget and Economic Outlook for fiscal years through 2021, estimating that unemployment will likely remain high until 2016 with modest job growth.

The CBO expects that the unemployment rate will fall to 9.2 percent in the fourth quarter of 2011, 8.2 percent in the fourth quarter of 2012 and 7.4 percent at the end of 2013 — still high above the natural rate of unemployment of 5 percent. The CBO also says that the tax cut/unemployment extension deal will provide a “short-term” boost to the economy, similar to what Moody’s Economist Mark Zandi predicted will raise growth in the first half of 2011.

The CBO also took a look at the budget, which has a record deficit of $1.5 trillion — or about ten percent of output. The CBO predicts that the deficit will decline rapidly in the next five years — mostly because of increased revenues due to economic output. However, the calculations do not include an extension of the 2010 tax cuts deal, the Medicare “doc fix” or some of the tax credits in the stimulus package, all of which will sunset, but will be difficult not to extend because of their political popularity or impact on growth.