There are probably more than a few economists wandering around the Congressional Budget Office today wishing they had been a little more optimistic when they put together the economic forecast released by that agency earlier this week. This morning’s Labor Department release on January employment was a very pleasant surprise to almost everyone—and in sharp contrast to the gloomy prognostication by CBO that U.S. unemployment would average 8.9 percent in the last three months of this year and 9.2 percent in the last three months of next year.
The Labor Department on the other hand reported today that the rate of unemployment over the past month fell to 8.3 percent, but also reported that 50,000 new jobs were added in manufacturing, where the average work week also increased as did overtime. Major upward revisions were made in employment levels reported in earlier months, adding credibility to suspicions that more new businesses were being created than the government survey of establishments had been able to identify.
But closer reading of the CBO forecast will make it difficult to dismiss it as simply being behind the curve in anticipating recovery. CBO plainly acknowledges that they are significantly more pessimistic than the Federal Reserve and most private forecasters, including the Blue Chip Average, which combines the more than 50 monthly forecasts by major banks and financial institutions.
CBO begins the discussion of its forecast by stating, “CBO’s current projections for the growth of real GDP [total growth in the economy factoring in inflation] in 2012 and 2013 are … weaker than those by the Blue Chip consensus and the Federal Reserve,” and that “CBO’s projections for the unemployment rate are higher.” But they point out that is not simply the product of the dour dispositions of those who practice the dismal science at that agency but because they are required to apply “federal fiscal policy specified in current law,” which leads to a different forecast than that of other forecasters.
CBO is required, for instance, to assume that the payroll tax breaks and unemployment benefits set to expire in less than four weeks actually will expire, while the forecasters for the banks and financial houses are allowed to assume that Congress will come to its senses and pass an extension. The difference in the forecasts is in fact a statement of how important a deal on payroll taxes and unemployment benefits is at this point of the recovery.
Our economy seems to have finally gotten a small puff of wind in its sails. It is time for Congress to get down to work on a package that will allow that forward progress to continue. Just as the inability of Congress to grasp the importance and necessity of assuring creditors that the United States would stand behind its debt obligations last summer put the nation’s good faith and credit at risk, it also raised alarm that Washington’s capacity for sensible governance had evaporated. Failure to catch the favorable wind demonstrated in the January employment numbers will put those concerns back into the limelight and once again threaten the prospects of the long-awaited recovery.
Scott Lilly is a Senior Fellow at the Center for American Progress.