CBO Byte

CBO Increases Growth Projections Again

January 31, 2001 

By Dean Baker

The Congressional Budget Office (CBO) once again increased their projections for growth in the latest Economic and Budget Outlook. The CBO now projects that GDP growth will average 3.1 percent annually over the next decade. This is an increase of approximately 0.4 percentage points from its last report. The new projections simply a cumulative surplus of $5.6 trillion over the decade. This is enough to allow the publicly held debt to be paid off in the 2009 fiscal year.

The new projections imply a brighter picture for Social Security in both the short-term and long-term. The new numbers show the cumulative surplus in the Social Security trust fund rising to $3.66 trillion by the end of 2011. This is more than $100 billion higher than the projections in the most recent Social Security trustees' report. In fact, the differences are actually somewhat greater than these numbers imply, because the Social Security trustees assume a considerably more rapid rate of inflation than does CBO. Measured against a common inflation rate, the CBO projections would show that the cumulative surplus in the trust fund will be approximately $400 billion higher than what the Social Security trustees project for the year 2011.

If the trustees adopt CBO's assumption about the economy's long-run potential productivity growth, then it will significantly improve the Social Security trust fund's long-range outlook. The new projections put the labor productivity growth projection at approximately 2.2 percent annually. This compares to 1.45 percent in the Social Security trustees' report. After adjusting for some differences in measurement, the CBO projection is still approximately 0.4 percentage points higher than the Social Security trustees projection for productivity growth. If the trustees used the CBO numbers, it would reduce the projected long-term shortfall by approximately 0.4 percentage points. More importantly, with this revision the Social Security program would be projected to be fully solvent until approximately 2042.

The CBO projections continue to show a rather negative picture for corporate profits. The new projections show that corporate profits will be approximately 10 percent higher in 2011 than they were in 2000, after adjusting for inflation (using the CPI). This modest pace of profit growth could have dismal implications for the stock market, if it proves correct. If stock prices grow at the same pace as corporate earnings, a long-term pattern generally accepted by economists, then the CBO numbers imply that real stock prices will increase by an average of just 1.0 percent a year over the next decade. Since the average dividend yield is currently 2.0 percent, this implies a total real return on stock of just 3.0 percent. By contrast, CBO projects that ten-year government bonds will have an average real return of 3.3 percent.

It is worth noting that CBO does not use a separate projection for the stock market to derive its capital gains tax projections. Rather, it assumes that capital gains tax revenue will maintain a relatively fixed relationship to GDP. This method will overestimate capital gains tax revenue in periods where the stock market is performing poorly. CBO has projected a cumulative total of $1.1 trillion in capital gains revenue over the next decade.

There is one clear turn for the worse in the newest CBO numbers. It has raised its projections of unemployment. For 2001, CBO now projects an average unemployment rate of 4.4 percent. The most recent projection was 3.7 percent. The projected average over the next five years has been raised from 4.3 to 4.7 percent, with the longer term number now projected as 5.2 percent.