The recent decline in gas prices has not only left a little more cash in Americans’ pockets, it has contributed to a sizeable increase in economic output. According to the Congressional Budget Office’s (CBO) annual report, Budget and Economic Outlook, the decline in oil and gas prices that occurred between August and December of 2014 will raise economic output by 0.3 percent, or more than $50 billion, by the end of 2015. Lower oil prices are also projected to boost output for the 2016 to 2019 period but by smaller amounts as oil costs are expected to partially rebound.
In addition to the impact oil prices are having on the CBO’s budget and economic outlook, there were a few notable changes in the CBO’s economic forecasts. For starters, the CBO now estimates that real gross domestic product (GDP) grew 2.1 percent in 2014, significantly lower than its projection last year of 2.7 percent growth in 2014.
Going forward, the CBO projects that the gap between actual GDP and potential GDP will decline and essentially disappear by the end of 2017. The declining gap, however, is unfortunately not the result of higher-than-expected GDP, but rather a decline in the CBO’s projections for potential GDP. Lower potential GDP projections are attributed to slower labor market growth than in prior decades and “lingering effects of the recent recession and of the ensuing slow recovery.” All told, the decline in potential GDP from the CBO’s August 2014 “Update to the Budget and Economic Outlook” to its current projections translates into a 1 percent—or roughly $215 billion—decline in real GDP in 2024.
On the positive side, the unemployment rate was markedly lower in 2014 than the CBO previously forecast; it averaged 6.2 percent in 2014 compared to the CBO’s estimate of 6.8 percent last February. Unemployment is now projected to be significantly lower in the near term, and slightly lower on average—5.4 percent versus last year’s projection of 5.6 percent—over the longer term.
While the CBO’s outlook for inflation was relatively unchanged over the next decade, interest rates are expected to be slightly lower than previously projected.
The CBO will release an update to its economic and budget outlook sometime this summer.
