NCPA - National Center for Policy Analysis


January 9, 2009

The sharp downturn in housing markets across the country, which undermined the solvency of major financial institutions and severely disrupted the functioning of financial markets has led the United States into a recession that will probably be the longest and the deepest since World War II.  The Congressional Budget Office (CBO) anticipates that the recession -- which began about a year ago -- will last well into 2009.

Under an assumption that current laws and policies regarding federal spending and taxation remain the same, CBO forecasts the following:

  • A marked contraction in the U.S. economy in calendar year 2009, with real (inflation-adjusted) gross domestic product (GDP) falling by 2.2 percent.
  • A slow recovery in 2010, with real GDP growing by only 1.5 percent.
  • An unemployment rate that will exceed 9 percent early in 2010.
  • A continued decline in inflation, both because inflation excluding energy and food prices -- the core rate -- tends to ease during and immediately after a recession; for 2009, CBO anticipates that inflation, as measured by the consumer price index for all urban consumers (CPI-U), will be only 0.1 percent.

As well as:

  • A drop in the national average price of a home, as measured by the Federal Housing Finance Agency's purchase-only index, of an additional 14 percent between the third quarter of 2008 and the second quarter of 2010.
  • A decrease of more than 1 percent in real consumption in 2009, followed by moderate growth in 2010.
  • A financial system that remains strained, although some credit markets have started to improve; it is too early to determine whether the government's actions to date have been sufficient to put the system on a path to recovery.

The major slowdown in economic activity and the policy responses to the turmoil in the housing and financial markets have significantly affected the federal budget.  As a share of the economy, the deficit for this year is anticipated to be the largest recorded since World War II:

  • CBO projects that the deficit this year will total $1.2 trillion, or 8.3 percent of GDP; enactment of an economic stimulus package would add to that deficit (in CBO's baseline, the deficit for 2010 falls to 4.9 percent of GDP, still high by historical standards).
  • CBO expects federal revenues to decline by $166 billion, or 6.6 percent, from the amount in 2008.

Source: Congressional Budget Office, "The Budget and Economic Outlook: Fiscal Years 2009 to 2019," Congress of the United States, January 2009.

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