--CBO sees US 10-yr note avg at 4.9% in '01; 3-mos bill avg 4.8%
By Edward Kean, BridgeNews
Washington--Jan. 31--The U.S. economy should continue to expand in 2001, but there is a "major risk" that unexpectedly sharp cutbacks in consumer and business spending could lead to a recession this year, the Congressional Budget Office said Wednesday.
* * * "A major risk to CBO's short-term forecast is that consumers and businesses will curtail their spending much more than CBO assumes, leading to a recession this year," CBO said in the release of its latest U.S. economic outlook.
CBO confirmed previous reports it is projecting the U.S. economy will expand 2.4% this year, about half the rapid increase of about 5% last year.
Nonetheless, CBO's mention of unexpectedly sharp spending cutbacks as a "major risk" suggests the agency is wary about the economic outlook. In remarks for delivery to the Senate Budget Committee, CBO Deputy Director Barry Anderson said spending is likely to remain "weak in the near-term." But he expressed confidence that business activity would improve later this year and next year.
"The dip in the economy is expected to be short-lived," he said. "CBO forecasts that economic growth will pick up again in the middle of 2001." Lower interest rates will "set the stage" for faster growth in spending next year, CBO said, predicting real Gross Domestic Product will rise at a more rapid 3.4% pace in 2002.
Even if the economy slips into recession this year, Anderson said it would reduce the projected cumulative $5.6 trillion budget surplus over the next year by only $200 billion.
As for interest rates, CBO said it projects that the U.S. 10-year Treasury note rate will average 4.9%, down from the current rate of about 5.2%.
Meanwhile, rates on three-month Treasury bills are expected to average about 4.8% this year, about the same as their current level. CBO did not give a formal prediction on how much more the Federal Reserve might lower interest rates this year. The Fed is widely expected to cut interest rates one-half percentage point later today, marking the second such reduction this month.
But Anderson told reporters CBO's interest rate assumptions reflect general expectations about Fed policy.
CBO also made the following forecasts for the economy:
--Inflation, as measured by the consumer price index, should rise 2.8% this year, down from a 3.4% increase last year. CBO attributed the slowdown to lower energy prices. But the core CPI, excluding food and energy prices, is expected to rise 2.8% this year, up from 2.6%, reflecting the impact of tight labor markets, CBO said.
--The unemployment rate is expected to edge up to 4.4% this year and 4.5% next year from its current 4.0% level.
--The economy's long-term non-inflationary growth rate over the next 10 years is 3.3%, about 0.3 percentage point above the agency's prior projection.
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