Tue April 17, 2018

The Congressional Budget Office’s (CBO) budget and economic outlook for 2018 to 2028 paints a rosy picture of the U.S. economy this and next year. After months of delay in releasing its annual budget and economic report to incorporate the effects of major legislations specifically the federal tax reform and increased projected discretionary spending, the CBO projects U.S. real GDP growth at 3.3 percent this year, higher than the 2.2 percent prior forecast, and 2.4 percent in 2019. The CBO’s view that the recent tax reform will increase labor supply and capital in the economy is expected and consistent with economic theory. Hence, potential Gross Domestic Product (GDP) is expected to be higher in the forecast horizon.

It is projected that the U.S. economy will experience excess demand starting this year, which will eventually disappear by 2022. Growth will be driven by higher consumer spending and business investment, with increased federal spending contributing to economic growth, according to CBO’s annual economic outlook.

Given that the U.S. economy is operating at full capacity, excess demand – that is demand for goods and services are above the economy’s sustainable supply of goods and services – will generate inflationary pressures which will lead to higher interest rates as the federal government raises the federal funds rate to temper inflationary pressures. Excess demand will continue to unemployment to further decline.

If the CBO’s projections hold—given uncertainties in forecasts particularly in longer time horizons—it could only mean that business activity in the plastics industry will stay upbeat.

As excess demand diminishes by 2022, GDP growth will stay slightly below potential as temporary provisions in personal income tax cuts expire and higher borrowing costs affect business investment spending.