The economy has been moving in the right direction for two and a half years, but so slowly that the Congressional Budget Office (CBO) says in its latest The Budget and Economic Outlookthat “the economy remains in a severe slump” and will not be back to operating on all cylinders until the first half of 2018.
This chart shows CBO’s estimates of potential GDP (what the economy could produce if it
made full use of labor and factories and other capital) and actual GDP. As it shows, the economy is operating well below capacity and will have to grow substantially faster than CBO now projects in order to eliminate the gap between actual and potential GDP before 2018.
Policymakers should be pursuing temporary policies that give the economy more of a boost in the short term (so that we get back to operating at full capacity faster) while enacting longer-term deficit-reduction policies that don’t take effect until the economy is stronger (since large spending cuts or tax increases now would weaken the recovery).
For more charts on the recovery, see our chart book, The Legacy of the Great Recession.