The Congressional Budget Office expects economic growth to slow this year and unemployment to rise over the next couple of years, it announced in an update to its economic projections released Wednesday.
The nonpartisan group of congressional budget analysts foresee the Federal Reserve as being successful in its quest to drive down inflation, but with economic costs. While gross domestic product growth will remain positive amid the Fed’s tightening, GDP growth will be slower than normal through 2024.
Real GDP growth will slow to a 0.4% annual rate in the second half of this year, and for 2023 as a whole will increase by 0.9%, according to the report. The CBO predicts that as the Fed begins easing monetary policy, GDP will increase by 1.5% in 2024, still a reading that is below trend.
Likewise, the Fed’s actions are expected to cause unemployment to rise. Thus far, the labor market has remained remarkably resilient in the face of the rate hikes. Unemployment has fluctuated between 3.4% and 3.7% over the past year or so, a historically low level.
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But the CBO predicts that will change as the year comes to a close and the initial slowdown in economic growth begins to result in layoffs.
The unemployment rate will tick up to 4.1% by the end of this year, the CBO projects, before increasing even further to 4.7% by the end of 2024 — notably a full percentage point higher than now. In 2025, the unemployment rate will fall slightly to 4.5%, according to the analysts.
Last month, the economy added 209,000 jobs. The CBO projects that monthly employment growth will average just over 100,000 jobs in the second half of the year but that job growth will become negative in 2024. Next year, employment will decline by about 10,000 jobs per month before increasing to 6,000-jobs-per-month growth in 2025, the CBO predicts.
The CBO also projects that the Fed will be able to successfully drive down inflation, the pace of which has been declining over the past 12 months.
Inflation, as gauged by the consumer price index, is now clocking in at 3% — much lower than the blistering 9.1% felt in June 2022. The CBO projects that CPI inflation will fall to 3.3% by the end of this year before retreating to 2.7% by the end of next year and 2.2% in 2025.
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The Fed raised rates by a modest quarter percentage point Wednesday afternoon. Given recent indications of falling inflation (and a slightly softening labor market) most investors expect this to be the central bank’s last rate revision in its tightening cycle.
