The consensus projected real GNP to rise from the fourth quarter of 1981 to the fourth quarter of 1982 by 3.0%, with a strong second-half showing, but actual output declined by 1.2%. The projected 7.2% rise in the GNP implicit price deflator was much larger than the actual increase of only 4.6%. Nominal GNP increased by a meager 3.3%, but the consensus forecast anticipated a more robust 10.4%. The unemployment rate by yearend 1982 was projected in a range of 8.1% to 8.8%, but the average rate for the fourth quarter turned out to be 10.7%. Finally, the 91-day Treasury bill rate was expected to average around 11%% in last year's fourth quarter, but the actual rate was 7.9%. The combined effects of these large forecast errors will have a significantly adverse impact on the budget totals. Some of the effects were felt in 1982, but the heaviest impact of the unanticipated economic changes will be felt in 1983 and the outyears. For example, as described in greater detail later in this chapter, the 1983 deficit has been reestimated upward by $66 billion as a result of economic events in 1982. Recently there have been a number of developments to suggest that the economy bottomed in the fourth quarter of 1982 and that a 1983 recovery is imminent. New housing starts and permits reached their trough in October 1981 and have risen 43% and 75%, respectively, since then. The index of 12 leading indicators has risen in 7 out of the last 8 months. The ratio of coincident to lagging indicators (which typically leads an upturn in the economy by about 3 months) has been rising steadily since its July 1982 trough. Profit margins in the nonfinancial corporate sector are estimated to have increased at an annual rate of about 25%, reflecting better alignment of costs and prices. The interaction of lower tax rates, reduced inflation, and falling interest rates has placed the consumer in a strengthened position with respect to balance sheets, liquidity, after-tax income, and purchasing power. The massive inventory liquidation in the fourth quarter of 1982 (real inventories were accumulated at an annual rate of $3.4 billion in the third quarter and liquidated at a $17.7 billion rate in the fourth quarter) sets the stage for a recovery of employment and production in 1983. The recent decline in the value of the dollar should, with a lag, improve the competitive position of U.S. export ers. Locating the exact inflection point of economic recovery is a difficult task, but most signs point toward recovery during the first half of 1983, with greater momentum for economic growth developing during the year's second half. From the fourth quarter of 1982 to the fourth quarter of 1983, real output is expected to rise by 3.1%, while nominal GNP is projected to increase by 8.8%. Both inflation and interest rates are expected to consolidate the progress that occurred in 1982. The rate of unemployment is projected to trend downward during the year's second half, but for the year as a whole the unemployment rate is projected to average 10.7%. Economic Assumptions In contrast to the short-range forecast for 1983, the longer-range assumptions for the 1984-1988 period are not intended as precise forecasts of future economic conditions. Instead, they are trend projections, consistent with the economic policy objectives of the administration, that assume steady progress in reducing unemployment, inflation, and interest rates, and in sustaining strong real growth during the outyears. Although the growth of real output, productivity, and plant and equipment investment have fallen below trend in recent years, it is assumed that policies favoring budget restraint, capital formation incentives, and a sustained fight against inflation are consistent with a trend rate of growth of real output of 4% during the 1984–1988 period. Consistent with this trend growth of real output, the unemployment rate is expected to fall gradually to a calendar year average of 6.5% by 1988. Underscoring the commitment to a sustained inflation reduction and a moderate rate of monetary expansion, the growth of nominal GNP a is estimated to decline gradually from 9.2% in 1984 to 8.6% in 1988. This moderate growth rate for total spending or aggregate demand contrasts with the inflationary 11.2% growth of nominal GNP during 1977-1981. Major economic indicators: fourth quarter: Current dollars.......... Constant (1972) dollars ............... quarter).... fourth quarter) ? Amount Percent change, year over year .......... Constant (1972) dollars: Amount ........ Percent change, year over year. Personal income.. Corporate profits ......... Level (1972=100), annual average... Percent change, year over year.... Consumer Price Index: 2 Level (1967=100), annual average........ Percent change, year over year ............ Unemployment rates: Total, annual average Insured, annual average 207.2 6.0 218.1 5.2 229.4 5.2 9.4 272.3 3 10.7 5 9.9 4.7 6.1 7.9 9.8 6 8.0 10.2 1 Preliminary actual data. 2CPI for urban wage earners and clerical workers. Two versions of the CPI are now published. The index shown here is that currently used, as required by law, in calculating automatic cost-of-living increases for indexed Federal programs. The figures in this table reflect the actual CPI for December 1982, released January 21, 1983, which was 0.7% lower than had been projected; consequently, the cost-of-living adjustments estimated in the budget are higher than the actual adjustments will be. s Percent of total labor force, including armed forces stationed in the U.S. *This indicator measures unemployment under State regular unemployment insurance as a percentage of covered employment under that program. It does not include recipients of extended benefits under that program. General schedule pay raises become effective in October—the first month of the fiscal year. Thus, the October 1984 pay raise will set new pay scales that will be in effect during fiscal year 1985. The October 1981 pay raise for military personnel was 14.3%. 6 Average rate on new issues within period, on a bank discount basis. These projections assume, by convention, that interest rates decline with the rate of inflation. They do not represent a forecast of interest rates. The inflation rate during the outyear period is assumed to range between 4.5% and 5.0%, while both short- and longer-term interest rate trends are projected to decline further. By 1988, the 91-day Treasury bill rate is estimated at around 6%, with longer-term Government bonds yielding somewhat more. Importantly, with economic policies geared toward steady deficit reduction in 1984 and in the outyears, further reductions in inflation premiums as well as in the “real” or inflation-adjusted component of market interest rates are expected. 3 Major economic indicators: over fourth quarter: Current dollars.. Constant (1972) dollars................ fourth quarter) ..... over fourth quarter) 1 Amount............ Percent change, year over year. Constant (1972) dollars: Amount.......... Percent change, year over year. Personal income........ Corporate profits..... Level (1972=100), annual average. Percent change, year over year ...... Consumer Price Index: 1 Level (1967=100), annual average. Percent change, year over year. Unemployment rates: Total, annual average ? Insured, annual average 3 1,617 4.0 1,749 4.0 1,819 4.0 4.0 5 CPI for urban wage earners and clerical workers. Two versions of the CPI are now published. The index shown here is that currently used, as required by law, in calculating automatic cost-of-living increases for indexed Federal programs. The manner in which this index measures housing costs will change significantly in 1985. 2 Percent of total labor force, including armed forces stationed in the U.S. * This indicator measures unemployment under State regular unemployment insurance as a percentage of covered employment under that program. It does not include recipients of extended benefits under that program. * General schedule pay raises become effective in October —the first month of the fiscal year. Thus, the October 1985 pay raise will set new pay scales that will be in effect during fiscal year 1986. Average rate on new issues within period, on a bank discount basis. These projections assume, by convention, that interest rates decline with the rate of inflation. They do not represent a forecast of interest rates. EFFECTS ON THE BUDGET OF CHANGES IN ECONOMIC ASSUMPTIONS SINCE LAST YEAR The budgetary effects of the large forecasting errors in 1982 turned out to be quite substantial. A portion of the budget impact of last year's unanticipated economic changes affected the 1982 fiscal totals, where outlays were increased by $0.4 billion as a result of weaker real growth and higher unemployment, and revenues were reduced by $22.4 billion as a result of lower inflation and nominal GNP. The improvement in financial conditions came too late in the year to prevent interest expenses from increasing by $3.8 billion. The net effect of all these changes raised the deficit by $26 billion from the level estimated in February 1982. But the major budget effects of the 1982 forecasting errors will occur in 1983 and the outyears, and these economic influences are the single biggest factor in the large upward revisions of the deficit projections for the 1983–1987 period as compared with deficit estimates published one year ago. For the 1983 budget year the net effects of weaker than expected growth, lower inflation, and falling interest rates in calendar year 1982 are responsible for a $55 billion loss in receipts, an $11 billion increase in outlays, and a $66 billion increase in the deficit. The total deficit reestimate for 1983 |