The director of the nonpartisan Congressional Budget Office warned Wednesday that the economy is headed for at least a bumpy landing — and possibly worse — as a result of the Federal Reserve’s fight against inflation.
“For 2023, we project stagnant output, rising unemployment, gradually slowing inflation and interest rates that remain at or above their levels at the beginning of the year — before the economy subsequently rebounds,” said CBO Director Phillip Swagel in unveiling the agency’s annual forecasts for the economy and the U.S. budget.
The CBO also said it expects the Treasury Department to run out of borrowing room under the debt limit sometime between July and September. But it warned that the deadline could come before July if tax receipts come in below forecasts in the coming months, echoing projections from some private sector economists.
In its economic forecast, the CBO said, “Output growth comes to a halt in early 2023 in response to the sharp rise in interest rates in 2022.”
Unemployment will rise to 5.1% at the end of 2023, the CBO said, a spike from the 53-year low of 3.4% seen in January. The economy, as measured by the gross domestic product, is set to shrink in the first half of 2023, before rebounding to post a barely positive reading for the entire year, according to the forecast.
“The first half of the year in our projections is a difficult time.”
– Congressional Budget Office Director Phillip Swagel
The dour outlook marks something of a turnaround for the agency. By saying that growth will come to a “halt” and the GDP will shrink in the first half of 2023, the CBO may be seen as basically projecting a recession, even though more upbeat data readings recently have made economists increasingly optimistic the Fed could pull off a “soft landing” — raising interest rates enough to cool economic growth and tame inflation but not so much that the economy stops growing.
Swagel declined to say if the agency was projecting a recession, noting the National Bureau of Economic Research is widely seen as the arbiter of when economic recessions and expansions occur.
“The first half of the year in our projections is a difficult time,” he said. “It’s got rising unemployment. It’s not an enormous rise in the unemployment rate, but it’s certainly a rising unemployment rate. And income growth is slightly negative.”
Swagel himself had seemed more optimistic in August in a letter to lawmakers in which he said it was too soon to say if the economy had moved into a recession.
“It is possible that, in retrospect, it will become apparent that the economy moved into recession sometime this year. However, that is not clear from data that were available at the beginning of August,” he wrote.
One bright note in the agency’s forecasts was on inflation. Compared with the year before, inflation as measured by the Consumer Price Index is expected to fall to 4.8% in 2023 and drift down slowly to 3.0% in 2024 and 2.2% in 2025.
As part of its projections, the CBO also forecast the year in which Social Security would no longer be able to make full benefit payments. Its “exhaustion date,” had moved one year closer to 2032 from 2033.