WASHINGTON (Reuters) - Beneath the customary optimism of a political policy pitch, the Obama administration has cut its outlook for how fast the U.S. economy can grow without generating inflation.
As part of the assumptions underlying President Barack Obama’s 2014 budget proposal released on Wednesday, the White House said the potential growth rate currently appears to be 2.4 percent a year. That is down from an estimate of 2.5 percent in the 2013 budget plan and from 2.6 percent in the 2010 proposal.
For policymakers, the potential growth rate sets a sort of a speed limit for the pace at which living standards can improve over the long term without putting economic stability at risk.
Faster growth means more income. Considering the current size of the economy, an extra tenth of a point in growth would mean roughly $5,000 in additional economic output per person.
The White House did not explain exactly why it lowered its view of the economy’s capacity to expand, although it noted demographic changes will slow future growth in gross domestic product compared with before the 2007-09 recession.
“In the 21st century, real GDP growth in the United States is likely to be permanently slower,” the White House said.
It said future growth would be held back by an increase in the size of the retired population, as well as slower growth rates for the working-age population.
While the change in the long-term growth estimate was relatively slight, the White House’s view is now more bearish than the forecasts of most private sector analysts, whose projections also take into account demographic changes.
The White House said potential growth will fall further to a 2.3 percent rate after 2020. The Blue Chip survey of economic forecasters, against which the White House compares its estimates, suggests private economists think the economy will average growth rates of 2.5 percent over the long term.
Under either view, the economy is seen growing over the long haul at a much slower pace than many Americans have grown used to. Between 1947 and 2007, the potential growth rate was 3.2 percent, the budget proposal said.
In the near term, however, the administration’s views on economic growth appear much more optimistic than private forecasters.
Growth would average 2.3 percent in 2013 if Congress approved the president’s proposal in its entirety, the White House said. That is unlikely to happen, which is largely why the administration’s forecast is above the 1.8 percent growth projected by Blue Chip economists.
Since the end of the recession, the economy has struggled to grow at faster than a 2 percent rate, although recent data has suggested a housing recovery is shifting into higher gear, while consumers have made strides in reducing heavy debt loads.
Obama’s budget plan assumes a reversal of across-the-board spending cuts enacted last month. Those cuts are widely expected to weigh on the economy throughout the year. The budget also proposes spending on infrastructure that could boost growth.
This year, the White House sees the unemployment rate averaging 7.7 percent, just above the 7.6 percent rate reached in March.
In subsequent years, the White House sees growth accelerating more than private forecasters do, at least for a while. In 2016, for example, the administration expects a 3.6 percent growth rate, compared with a 2.9 percent rate in the Blue Chip forecast.
The reason for the difference, the budget documents say, is that private forecasters believe the last recession knocked the economy permanently below its prior growth path, while the administration thinks private demand will snap back.
Then around the end of the current decade, the White House’s forecasts for GDP growth begin to trail those of the private sector.
Reporting by Jason Lange; Editing by Tim Ahmann and Andre Grenon