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CBO forecasts ongoing output gap

February 03, 2021

Graph depicting estimated spread between actual and potential RGDP

Source: Congressional Budget Office

The latest Congressional Budget Office economic outlook calls for a rebound in real GDP of 3.7 percent this year, led by a jump in investment and a narrowing trade deficit, and generally middling growth across the remainder of the decade. Specifically, the CBO looks for real GDP to average just 1.7 between 2020 and 2030, with the trend dipping slightly below that pace in the back half of the decade (it should be noted that these figures do not incorporate any further fiscal stimulus, which should at least boost the 2021 outlook). This, then, is very much a view that long-term stagnation will continue, as growth in both the labor force and productivity are expected to remain weak.

Even with potential growth providing a low bar, however, the CBO still expects that the output gap, which it estimates at more than 3.0 percent of GDP currently, won’t reverse until 2025. These forecasts should always be taken with a big grain of salt given the uncertainties surrounding the economy’s true potential, but this serves as another reminder that the inflation now percolating is unlikely to be sustainable once COVID-related supply disruptions ease. Inflation is still a prime candidate to be the black swan event of this cycle, but it by definition can’t take hold in a lasting way as long as the economy continues to operate below its potential.

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What phrase did Alan Greenspan popularize after a meeting with future Nobel laureate Robert Shiller in 1996?

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What country’s 200-unit banknote appropriately matches the Pantone color “Frozen Fjord”?

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Norway

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