White House Projects 2.7% Growth, Sees Strengthening Trend

The Obama administration cut its forecast for U.S. economic growth this year and raised its unemployment outlook to an average of 9.3 percent, in an assessment completed in November, adding that more recent numbers show a trend toward strengthening.

Gross domestic product will increase 2.7 percent this year, the White House said today, compared with the 3.6 percent growth it predicted in July. Next year, the economy will expand 3.6 percent, compared with 4.2 percent in the previous forecast, according to economic predictions that accompanied President Barack Obama’s 2012 budget proposal.

The outlook is less gloomy than those numbers suggest because of stronger economic data in recent months and because of December legislation to lower taxes and extend unemployment benefits, the White House said. As a result, the economy may have a speedier return to its long-term potential, the budget said.

“These factors have caused most private forecasters to increase their near-term projections for real economic growth substantially,” the White House said. “The administration would probably make similar changes were it possible to reopen the forecast.”

On Feb. 9, Treasury Secretary Timothy F. Geithner said private economists and forecasters project annual economic growth of 3 percent to 4 percent over the next two years.

An unemployment rate of 9.3 percent this year was 0.3 percentage point higher than the administration’s July forecast. Today’s proposal projected that the jobless rate will fall to an average of 8.6 percent next year.

Record Deficit

The administration’s new budget projects a record $1.6 trillion deficit in fiscal year 2011 and a $1.1 trillion deficit the following year. The report includes proposals for a range of spending cuts and tax changes aimed at trimming the shortfall over the next decade.

“Now that the threat of a depression has passed, and economic growth is beginning to take hold, taking further steps toward reducing our long-term deficit has to be a priority,” Obama said in a letter to Congress accompanying the budget.

“In the long run, we will not be able to compete with countries like China if we keep borrowing more and more from countries like China,” he said. China is the largest overseas holder of U.S. government debt, with holdings of $895.6 billion as of November, according to the most recent available Treasury Department data.

Inflation Forecast

In the budget report, the administration projected inflation will hold below 2 percent in the next two years. The budget predicts the consumer price index will increase 1.3 percent in 2011 and 1.8 percent in 2012, before settling into a long-term range of about 2 percent.

Yields on Treasury debt are expected to rise. The budget predicts a 3 percent interest rate on 10-year notes in 2011 and a 3.6 percent rate in 2012, before settling at 5.3 percent by 2017.

The White House’s latest forecast calls for the economy to grow 4.4 percent in 2013, 4.3 percent in 2014 and 3.8 percent in 2015, before settling into 2.5 percent growth by 2019. Over the same time period, it calls for the jobless rate to drop to 7.5 percent in 2013 and 6.6 percent in 2014, falling each year until 2017, when unemployment is expected to be 5.3 percent.

The jobless rate unexpectedly fell in January to the lowest level in 21 months, while payroll growth was depressed by winter storms.

Joblessness Drops

Unemployment declined to 9 percent from December’s 9.4 percent, the Labor Department said Feb. 4 in Washington. Employers added 36,000 workers, short of the 146,000 median gain projected by economists in a Bloomberg News survey.

Secretary Geithner predicted last week that “the unemployment rate’s going to come down gradually over the next several years,” given current growth rates and private-sector forecasts. He said last month’s drop in joblessness “probably overstated” labor-market strength, while separate figures on hiring “probably understated” current conditions.

The Commerce Department said on Jan. 28 that the U.S. economy accelerated in the fourth quarter of 2010 as consumer spending climbed by the most in more than four years and gross domestic product grew at a 3.2 percent annual rate. For all of 2010, the world’s largest economy expanded 2.9 percent, the most in five years, after shrinking 2.6 percent in 2009.

The cost of living in the U.S. climbed more than forecast in December, led by higher fuel and food prices, while other goods and services showed the smallest annual increase on record. The consumer-price index increased 0.5 percent and the so-called core rate, which excludes volatile food and fuel costs, rose 0.1 percent, according to Jan. 14 figures from the Labor Department.

To contact the reporter on this story: Rebecca Christie in Washington at rchristie4@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net

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