OMB predicts economic improvement, warns against sequestration

Bad news about the U.S. economy and the massive national debt has long dominated the headlines, but a budget review shows brighter times could lie ahead -- if Congress and the White House can steer clear of sequestration.

The Office of Management and Budget on July 27 released its Mid-Session Review, which updates the Obama administration's estimates for outlays, receipts and the deficit following economic, legislative and other developments since the President's 2013 Budget was released in February.

The MSR does not directly affect federal agencies’ funding, but the administration did use the report to urge Congress to head off the across-the-board cuts that could hobble both the federal government and the broader economy. “Sequestration is, by design, bad policy that will have destructive effects on both defense and non-defense discretionary programs,” the MSR states. “Congress still has time to act and it should do so promptly, to reduce the deficit in a way that is balanced and not harmful to the economic health of the nation.”

Such changes themselves, of course, would almost certainly cut certain programs – though far fewer than sequestration would mandate.

The MSR shows the 2012 deficit is now projected to be $1,211 billion -- $116 billion lower than the $1,327 billion deficit project­ed in February. As a percentage of gross do­mestic product, the deficit is now estimated to equal 7.8 percent, which is a 0.7 percent less than February’s projection. Cumulative deficits for the next decade are also projected to be lower than previously project­ed, with a total reduction of $240 billion over the 10-year period.

Although the unemployment rate has dipped from its peak of 10 percent to 8.2 percent in June 2012 and industry employment has grown for 28 consecutive months, the economy still hasn’t had the boost it needs.

“[T]here are still too many people out of work. Most troubling, the pace of improvement in the labor market slowed in the second quar­ter of this year,” the review stated.

Obama’s proposals to get more Americans back to work and efforts to spur small-business activity have met resistance in Congress, the report noted. “With the exception of the short-term agreement in February 2012 to extend the payroll tax holiday and emergency unem­ployment provisions through the end of the calendar year, Congress has not yet passed any of these plans to boost economic growth and create jobs,” the MSR stated.

However, the projections show that unem­ployment will decline as the economy grows stronger. Beyond 2018, the administration’s forecast is based on the long-run trends expected for real GDP growth, price inflation and interest rates. Real GDP growth is expected to average 2.5 percent in the long run, an estimate that’s below the historical average for the United States, because of an expected slow­down in the growth of the wokrforce as the population grows older.

The administration also expects economic growth to continue at a mod­erate pace in 2012 and 2013 and to pick up in 2014. Operating well below its capacity has led to the nation having higher levels of unused resources, and the potential for quicker recov­ery is present in this low level of resource utili­zation, according to the review.