- The Washington Times - Friday, May 22, 2009

The U.S. economy will “stop contracting and resume growing during the second half of this year,” Congressional Budget Office Director Douglas Elmendorf said Thursday, but the unemployment rate will continue to climb and probably peak above 10 percent in the second half of next year.

Mr. Elmendorf told the House Budget Committee that the economic recovery would be “more tepid” than CBO previously estimated. Growth will be too slow to keep the unemployment rate from rising. Today’s unemployment rate is 8.9 percent, and it hasn’t been above 10 percent since 1983.

The recession that began in December 2007 will be the longest economic downturn in postwar history. By at least one measure of output, he said, “the current recession and its aftermath will be the most severe economic downturn in the postwar period.” Once the recovery begins, it may be short-lived, the CBO director warned.

A confluence of negative factors - the loss of household wealth, the fragility of financial institutions, weak growth in the rest of the world, a surplus of available housing and the low utilization of manufacturing capacity - “may cause the economy to slump again next year, as the effects of the stimulus begin to wane,” Mr. Elmendorf said.

“The recovery will falter in 2010 if private-sector demand for goods and services does not accelerate to offset the diminishing federal stimulus,” he said.

President Obama signed a $787 billion economic stimulus package in February. CBO has estimated that $585 billion of extra spending and tax cuts from the stimulus package would be injected into the economy by September 2010.

When CBO releases its revised economic forecast in August, it will likely reduce the 2.9 percent growth rate for next year that it projected in March. The latest Blue Chip consensus forecast, which represents projections by about 50 private economists, expects the economy to grow by just 1.9 percent in 2010 after declining 2.8 percent this year.

Mr. Elmendorf also warned that the long-term fiscal outlook threatens to jeopardize the extraordinary benefits that the U.S. derives from being considered a “safe haven” in times of world economic crisis. Those benefits include lower interest rates and increased liquidity.

“The long-term outlook for the federal budget is unsustainable, and if it is not resolved, will undermine economic growth,” the CBO chief warned. “The sharp increase in debt this year and over the next few years heightens the importance of putting the budget on a sustainable path as the economy approaches full employment,” he said.

In its March analysis of Mr. Obama’s 10-year budget blueprint, CBO estimated that the plan would generate $9.3 trillion in cumulative budget deficits. Publicly held debt as a percentage of gross domestic product would double from 41 percent in 2008 to 82 percent in 2019, CBO projected.

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