CBO revises projections of potential output with each semiannual economic forecast to take into consideration changes in current law, revised and new data, and new analysis and improvements in its methods of estimation. To assess the role of the most recent recession in those revisions, this report focuses on the change between the projections that CBO published in January 2007 and in February 2014 for 2017, the last projection year they had in common. From the earlier projection to the later one, CBO reduced by 7.3 percent the amount it projects for potential GDP in 2017. That calculation excludes changes in CBO’s projection that arise from the recent revisions (described below) to the definition of GDP by the Commerce Department’s Bureau of Economic Analysis (BEA).
Four main sources account for that 7.3 percent reduction, in CBO’s judgment, of its projection of potential GDP for 2017 (see the table below):
The impact of cyclical weakness in the economy accounts for just 1.8 percentage points, or about one fourth, of the difference from the 2007 projection, even though the downward revision to potential GDP coincided with the severe recession of 2007–2009 and the subsequent slow recovery.
Reassessments of economic trends that were in process before the recession began account for 4.8 percentage points, or about two-thirds, of the revision. For example, after the National Bureau of Economic Research designated the fourth quarter of 2007 as a business cycle peak, CBO concluded that trend rates of growth in the 2000s had generally been lower than they were in the 1990s.
Revisions to historical data for the period before the recent recession lowered the projection of potential output by 0.1 percentage points, a very small share of the revision.
The effects of changes in federal tax and spending policies, higher federal deficits, changes in the relative size of various sectors of the economy, and other factors after 2007 apart from cyclical conditions account for the remaining 0.7 percentage-point reduction, or about one-tenth of the revision.
