The document summarizes the Congressional Budget Office's (CBO) 10-year economic forecasting process, which involves background analysis, developing a preliminary forecast using macroeconomic models, internal and external review, and producing a final forecast. It also outlines CBO's current economic forecast and the effects that the 2017 tax act is projected to have on economic variables like GDP, inflation, and interest rates.

1. Congressional Budget Office
Congressional Research Service Seminar
April 26, 2018
Robert W. Arnold
Chief, Projections Unit, Macroeconomic Analysis Division
CBO’s 10-Year Economic Forecast
and How It Is Produced

2. 1
CBO
CBO’s Economic Forecast Process
Step 1: Background Analysis
 Develop preliminary forecast for exogenous variables (e.g., oil prices)
 Review recent data
Step 2: Preliminary Forecast
 Use macroeconometric model to develop preliminary forecast
 Incorporate preliminary federal tax and spending projections
Step 3: Internal and External Review
 Obtain input from CBO’s senior staff and other divisions within the agency
 Obtain feedback from CBO’s Panel of Economic Advisers and staff of
Congressional budget committees
Step 4: Final Forecast
 Incorporate feedback and latest data to produce final forecast
 Transmit to CBO’s budget and tax divisions to develop budget projections

3. 2
CBO
CBO’s Forecasting Models
CBO’s Macroeconometric Model
Aggregate Demand Other Variables
• Consumer spending • Inflation
• Business investment • Interest rates
• Residential investment • Labor market variables
• Government spending - Unemployment
• Net exports - Employment
- Wages & compensation
Aggregate Supply • Incomes
• Potential output
CBO’s Labor Force
Participation Rate Model
Exogenous Variables
• Population
• Energy prices
• Foreign growth
Policy Variables
• Labor supply elasticities
• Marginal tax rates
• Other fiscal policies
(Labor force participation rate)(Unemployment gap)
CBO’s Forecast
Growth Model
(Investment, potential labor force,
and other variables)
(Potential output, hours, productivity,
and other variables)
CBO’s Budget
Projections
• Federal outlays
• Federal revenues

4. 3
CBO
CBO’s Current
Economic Forecast

5. 4
CBO
Real potential GDP is CBO’s estimate of the economy’s maximum sustainable output, adjusted to remove the effects of inflation.
Growth of Real GDP and Real Potential GDP

6. 5
CBO
The output gap is the difference between the level of GDP and the level of potential GDP.
Output Gap

7. 6
CBO
Potential labor force productivity is the ratio of real potential GDP to the potential labor force, which is CBO’s estimate of the size of the
labor force arising from all sources except fluctuations in the overall demand for goods and services.
Determinants of the Growth of Real Potential GDP

8. 7
CBO
The unemployment rate is the number of jobless people who are available for and seeking work, expressed as a percentage of the labor
force. The natural unemployment rate is CBO’s estimate of the rate of unemployment arising from all sources except fluctuations in the
overall demand for goods and services.
Unemployment Rate

9. 8
CBO
The labor force participation rate is the percentage of people in the civilian noninstitutionalized population who are at least 16 years old
and either working or seeking work. The potential labor force participation rate is the rate that CBO estimates to arise from all sources
except fluctuations in the overall demand for goods and services
Labor Force Participation Rate

10. 9
CBO
Values are shown for changes in the price index for personal consumption expenditures.
Consumer Price Inflation

11. 10
CBO
Interest Rates

12. 11
CBO
Effects of the 2017 Tax Act

13. 12
CBO
Effects on Aggregate Supply:
 Increased business fixed investment
 Increased labor supply
 Decreased residential investment
Effects on Aggregate Demand:
 Increased consumption
 Decreased net exports
Macroeconomic Effects of the Tax Act

14. 13
CBO
Effects on Real GDP and Real Potential GDP

15. 14
CBO
Effects on the Output Gap

16. 15
CBO
Values shown are effects on the price index for personal consumption expenditures.
Effects on Consumer Prices

17. 16
CBO
Effects on Interest Rates

18. 17
CBO
Business fixed investment is businesses’ purchases of equipment, nonresidential structures, and intellectual property products. The
changes in incentives consist of changes in the user cost of capital, which is the gross pretax return on investment that provides the
required return to investors after covering taxes and depreciation, and changes in the benefits of locating business establishments in the
United States. Changes in economic activity consist of changes in demand for goods and services and changes in the supply of labor.
Crowding out occurs when larger federal deficits reduce the resources available for private investment.
Effects on Business Fixed Investment

19. 18
CBO
Effects on Residential Investment

20. 19
CBO
Congressional Budget Office, The Budget and Economic Outlook:
2018 to 2028 (April 2018), www.cbo.gov/publication/53651.
Robert W. Arnold, How CBO Produces Its 10-Year Economic Forecast,
Working Paper 2018-02 (Congressional Budget Office, February 2018),
www.cbo.gov/publication/53537.
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