CBO Economic Outlook: GDP, Treasury Yields, and Recession Indicators

The CBO released its Budget and Economic Outlook, 2023-33 yesterday. The projection, based on data available as of January 6, shows a shallow decline in GDP in 2023Q1 and 2023Q2.

Figure 1: Reported GDP (bold black), CBO projection (blue), SPF median forecast (red), IMF WEO projection (sky blue), GDPNow at 2/16 (green triangle), potential GDP (gray), all in billions Ch.2012$ SAAR. Source: BEA 2022Q4 advance release, CBO, Philadelphia Fed, Atlanta Fed, IMF WEO (January), and author’s calculations.

The CBO forecast was based on data available January 6th, so does not incorporate the Q4 advance release, nor subsequent information.

Note that interest rates are also projected to be much higher, following actual developments in financial markets.

Figure 2: Ten year Treasury yield (bold black), CBO February 2023 projection (blue), CBO May 2022 projection (teal), and SPF February median forecast (red), all in %. 2023Q1 is for first half of quarter. Source: Treasury via FRED, CBO (various), and Philadelphia Fed.

The higher interest rates — along with other developments — imply slower growth in GDP, so slow there are two quarters of negative growth (although the Q2 rate is -0.1% q/q, essentially zero). The implied peak for GDP is 2022Q4 in the CBO projection. Nonetheless, the document makes no mention of a recession in 2023.

Figure 3: Nonfarm payroll employment – actual (bold blue), projected (blue), GDP – actual (bold pink), projected (pink), real personal income ex-current transfers – actual (bold light green), real personal income – projected (light green), real consumption – actual (bold sky blue), projected (sky blue), all in logs, 2022Q4=0. 2023Q1 NFP observation is for January. Source: BLS, BEA 2022Q4 advance, CBO (February), author’s calculations.

While GDP does drop slightly, NFP is flat, and consumption and personal income continue to rise. As NBER’s Business Cycle Dating Committee does not place main reliance on GDP (given the numerous revisions that occur to it), but rather employment and personal income, it makes sense that recession is not projected.

GDPNow as of today indicates that GDP in 2023Q1 will be substantially higher than forecasted by CBO (green triangle in Figure 1; at 2.5% SAAR in Q1), and indeed higher even than the median from the February Survey of Professional Forecasters. However, that doesn’t mean the slowdown is canceled, merely perhaps delayed.