U.S. economic growth will recover “rapidly” and the labor market will return to full strength more quickly than expected, thanks to the vaccine rollout and a barrage of legislation enacted in 2020, according to a government forecast published on Monday.
Gross domestic product, or GDP, is expected to reach its previous peak in mid-2021 and the labor force is forecast to return to its pre-pandemic level in 2022, the nonpartisan Congressional Budget Office said.
Importantly, the CBO said its rosier projections do not assume any new stimulus, including President Joe Biden’s $1.9 trillion stimulus plan.
Here’s what the CBO sees for the U.S. economy:
- Real GDP to grow 3.7 percent in 2021
- GDP growth to average 2.6 percent over the next five years
- The unemployment rate to fall to 5.3 percent in 2021, and further to 4 percent between 2024 and 2025
- Inflation to rise to 2 percent after 2023
- The Federal Reserve to start hiking the federal funds rate in mid-2024
- Upgrades the economic outlook through 2025
These projections are a stronger outlook than the budget office’s prior forecast from summer 2020, when the CBO said it expected the coronavirus to sap about $7.9 trillion of economic activity over the next decade-plus.
The CBO said it upgraded its estimates “because the downturn was not as severe as expected and because the first stage of the recovery took place sooner and was stronger than expected.”
The CBO said it upgraded its estimates “because the downturn was not as severe as expected and because the first stage of the recovery took place sooner and was stronger than expected.” CBO staff added that businesses proved more able to adapt to government-imposed restrictions, but that certain industries — like hospitality and food services — are still struggling.
Regardless, the rapid expansion the CBO projects for the next five years is expected to moderate in the five years thereafter, amid an uptick in prices and a more normal level of long-term consumer spending.
Between 2026 and 2031, the CBO foresees real GDP growth of about 1.6 percent annually and the Fed allowing inflation to run above its 2 percent target.
The office also issued some analysis of the recent, $900 billion stimulus package that Congress passed in December. CBO estimates that the pandemic-related provisions in that legislation will add $774 billion to the deficit in fiscal year 2021 and $98 billion in 2022.
Those provisions will boost the level of real GDP by 1.5 percent, on average, in calendar years 2021 and 2022, CBO estimates.
The CBO’s outlook comes at a precarious time for the economy as the coronavirus prompts many states to impose business closures and other social-distancing measures to help slow the spread of the disease.
Economists say the economy suffered a brief, but sharp recession in 2020 as the unemployment rate spiked to 14.8 percent in April and growth contracted 31.4 percent in the second quarter. Covid-19 has killed more than 440,000 Americans, according to data compiled by Johns Hopkins University.
While the economy has come a long way since then, both Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell have in recent months warned that Congress may need to pass additional stimulus to support households and business until the Covid-19 vaccine is more widely available.
According to the latest reading, the U.S. employment rate stood at 6.7 percent in December. The Labor Department is scheduled to publish the next look at the employment situation this Friday.