CBO warns U.S. faces higher recession risk

By Richard Cowan

WASHINGTON (Reuters) - The United States is at an "elevated" risk of economic recession because of housing woes, faltering confidence within financial markets and high oil prices, the nonpartisan Congressional Budget Office said on Wednesday.

"The economic outlook right now is particularly uncertain," said CBO Director Peter Orszag in testimony presented to the House of Representatives Budget Committee. "Economic activity has probably already slowed significantly and the risk of a recession is now elevated."

Orszag, who noted that his agency will issue a more detailed forecast in January, said that "most analysts" believe the United States will avoid a recession but that the economy "will grow relatively weakly for several quarters."

The economic slowdown would come in the thick of presidential and congressional election campaigns, prompting Democrats and Republicans to begin laying blame.

With polls showing Americans increasingly worried about the economy, and maybe more so than over the Iraq war, Republicans launched a new attack against Democratic policies, accusing them of raising taxes and imposing pro-labor policies that they said would lead to massive job losses.

"Since taking control of the United States Congress, congressional Democrats have waged an undeclared, but aggressive war that poses a rising threat to millions of American jobs and the prosperity of American families," said a 58-page report written by House Republican leaders.

Democrats scoffed at the Republican attack.

"The fact is job creation during Republican rule in Washington over the past six years was somewhere between anemic and pathetic," said House Democratic Leader Steny Hoyer. "The Bush economy has shed millions of jobs, the average household income is down, and costs for health care, college and gas are skyrocketing."

In August, the CBO, Congress' in-house budget and economic analyst, projected 2.9 percent growth in real gross domestic product in 2008. Last week, the White House said it expected real GDP to grow 2.7 percent in 2008, down from a June forecast for 3.1 percent growth.

House Budget Committee Chairman John Spratt, a South Carolina Democrat who will be writing a fiscal 2009 budget blueprint in coming months, opened the hearing asking, "Are we at the tipping point, headed into a recession or just leaning into a slump or a slowdown?"

Harvard University professor of economics Martin Feldstein, who testified that he thinks the chance of a recession next year "has now reached 50 percent," called on Congress to head off such a downturn by passing tax cuts now, which would be triggered only if the economy worsens.

Congress might launch a broad review of U.S. tax policy next year, led by House Ways and Means Committee Chairman Charles Rangel, who has proposed an overhaul that has been widely criticized by Republicans. But decisions are unlikely at least until 2009, when a new president takes office.

Reacting to Feldstein's tax-cut call, Spratt questioned the wisdom of a broad stimulus package and wondered whether Congress should instead focus on stemming a "raft of foreclosures" in the housing market if steps being sketched out by Treasury Secretary Henry Paulson prove to be inadequate.

Rep. Paul Ryan of Wisconsin, the senior Republican on the budget committee, asked whether Congress might be "inviting future disaster" with a bailout "and shouldn't investors who took risks bear the down side of those risks?"

(Additional reporting by Donna Smith; Editing by Jonathan Oatis)