CBO doesn’t see double-dip recession

Congressional Budget Office Director Doug Elmendorf signaled Tuesday that the agency does not expect a double-dip recession despite a worrying May jobs report that showed unemployment creeping up to 9.1 percent.

“Our economic forecast from January had the United States on a path of modest growth for the next four to five years,” he said. “We are going to be releasing an update of the economic forecast. At this point I don’t expect large changes to this forecast.”

{mosads}The CBO January report predicted 3.1 percent growth this year and 2.8 percent next year. It also projects 5.5 percent unemployment by the middle of the decade.

Elmendorf does not back specific policies, but said that, in his view, the major constraint on the economy is lack of demand. Former National Economic Council Director Lawrence Summers argued this week for a new economic stimulus package to pump up demand.

Elmendorf said that the concerns raised by Summers are very real and that “great pain” from the recession still remains ahead, especially for the young who cannot find jobs. 

The largest risks are a spike in oil prices, a further slump in household and business confidence, and sovereign debt problems in Europe.

But higher household savings, greater cash on hand for business and low levels of house construction could boost growth, he noted. 

Elmendorf, speaking at a Christian Science Monitor breakfast for reporters, said that CBO continues to estimate that large budget cuts and tax increases in “the next few years” could hurt economic growth, but that cuts in the second half of the decade could increase demand now by reducing concerns over fiscal stability. 

Congressional deficit talks led by Vice President Biden are set to focus on the contentious issue of spending caps and debt triggers on Tuesday. The GOP wants a hard cap on overall spending based on historical averages. 

The White House wants a so-called trigger that would force cuts or tax increases if the debt does not decline.

Elmendorf warned that triggers and caps “are not a substitute for the actual policy decisions.”

“History shows that the efficacy of the target depends on whether it is at the level for which there is a political consensus,” he said.

He noted that the targets in the Gramm-Rudman-Hollings Act of the 1980s were deemed too low and shunted aside, and that merely looking at historical benchmarks is not sufficient in designing a mechanism given structural changes such as an aging population and rising healthcare costs. 

Elmendorf said he thinks it “extremely unlikely” politicians will allow the U.S. to default on its debt in a way that causes market turmoil. But he warned that failure to reach a deal could “spook” investors, and that even small jitters could balloon the size of the U.S. debt by raising interest rates. 

He would not say whether CBO has been assisting the Biden talks with estimates.

Asked whether he feels under siege given Republican criticism of his evaluation of the House-passed budget, he said he does not.

“I am not feeling embattled, I do not feel it is any worse than usual.”

Elmendorf has estimated that the budget, authored by Rep. Paul Ryan (R-Wis.), will greatly add to out-of-pocket costs for future seniors.

“Our culture, our process for doing analysis is designed to set those personal views aside,” he added. “I don’t know what various members of the healthcare team thought about the desirability of last year’s health reform.”