CBO Says Jobless Rate Won’t Turn Down Until Mid-Year

The Congressional Budget Office’s new economic and deficit forecast is out today, a week before the White House updates its forecast. Some highlights:

• CBO expects that the unemployment rate, now 10%, will rise before turning down in the second half of the year, averaging 10% in the last three months of 2010. It sees a very gradual decline in unemployment in 2011 to an average of 9.1% in the fourth quarter of that year.

• CBO doesn’t expect the jobless rate to reach 5% — the level it deems consistent with the usual rate of job turnover in U.S. labor markets — until 2016.

• The agency estimates the U.S. economy shrank at by 0.4%, adjusted for inflation, between fourth quarters of 2008 and 2009, and predicted it’ll grow by 2.1% over the four quarters of 2010 and 2.4% over the four quarter of 2011, slower growth than the consensus of private forecasters and public forecasts of Federal Reserve officials.

Here’s how CBO summarizes its economic outlook.

“The deep recession that began two years ago appears to have ended in mid-2009. Economic activity picked up during the second half of last year, with inflation-adjusted GDP and industrial production both showing gains. Still, GDP remains roughly 6½ percent below CBO’s estimate of the output that could be produced if all labor and capital were fully employed (that difference is called the output gap), and the unemployment rate—at 10 percent—is twice what it was two years ago.”

“Economic growth in the next few years will probably be muted in the aftermath of the financial and economic turmoil. Experience in the United States and in other countries suggests that recovery from recessions triggered by financial crises and large declines in asset prices tends to be protracted. Also, although aggressive action on the part of the Federal Reserve and the fiscal stimulus package enacted in early 2009 helped moderate the severity of the recession and shorten its duration, the support coming from those sources is expected to wane. Furthermore, spending by households is likely to be constrained by slow growth of income, lost wealth, and constraints on their ability to borrow, while investment spending will be slowed by the large number of vacant homes and offices.”