CBO has developed preliminary projections of key economic variables through the end of calendar year 2021, based on information about the economy that was available through yesterday and including the effects of an economic boost from legislation recently enacted in response to the pandemic. In addition, CBO has developed a preliminary assessment of federal budget deficits and debt for fiscal years 2020 and 2021. CBO will provide a comprehensive analysis of that legislation and updated baseline budget projections later this year.

In the second quarter of 2020, the economy will experience a sharp contraction, and CBO’s current economic projections include the following:

Inflation-adjusted gross domestic product (real GDP) is expected to decline by about 12 percent during the second quarter, equivalent to a decline at an annual rate of 40 percent for that quarter.

(real GDP) is expected to decline by about 12 percent during the second quarter, equivalent to a decline at an annual rate of 40 percent for that quarter. The unemployment rate is expected to average close to 14 percent during the second quarter.

is expected to average close to 14 percent during the second quarter. Interest rates on 3-month Treasury bills and 10-year Treasury notes are expected to average 0.1 percent and 0.6 percent, respectively, during that quarter.

For fiscal year 2020, CBO's early look at the fiscal outlook shows the following:

The federal budget deficit is projected to be $3.7 trillion.

is projected to be $3.7 trillion. Federal debt held by the public is projected to be 101 percent of GDP by the end of the fiscal year.

To develop a preliminary view of the deficit and thus of federal borrowing, CBO took into account the estimated effects on the deficit of pandemic-related legislation enacted on March 4, March 18, March 27, and April 24. CBO made a rough assessment of the overall changes in federal spending and revenues resulting from the sharp deterioration in the economic outlook since January, when the agency issued its most recent complete economic forecast.

CBO’s most recent budget baseline projections released in March reflected the economic forecast from January, which did not include the consequences of the pandemic. The view of deficits and debt that CBO is presenting today is far more limited than an updated baseline, which would include account-level projections for the entire budget. CBO expects to publish such a baseline later this year.

Projections of Key Economic Variables

The economy will experience a sharp contraction in the second quarter of 2020 stemming from factors related to the pandemic, including the social distancing measures put in place to contain it. In the third quarter, economic activity is expected to increase, as concerns about the pandemic diminish and state and local governments ease stay-at-home orders, bans on public gatherings, and other measures restraining economic activity. However, challenges in the economy and the labor market are expected to persist for some time. Interest rates on federal borrowing are expected to remain quite low in relation to rates in recent decades.

The outlook for a few key economic variables through the end of calendar year 2021 is discussed below. In mid-May, CBO plans to release details underlying its economic outlook for 2020 and 2021 and provide more discussion.

Output. After a sharp contraction in the second quarter, economic growth is expected to average about 17 percent at an annual rate in the second half of calendar year 2020. (For the quarterly pattern of changes in GDP, see the table below.) Increases in consumer spending are expected to more than offset further declines in business investment during that period. In 2021, real GDP is projected to grow by 2.8 percent, on a fourth-quarter-to-fourth-quarter basis. Under that projection, real GDP at the end of 2021 would be 6.7 percent below what CBO projected for that quarter in its economic outlook produced in January 2020.

CBO's Economic Projections for 2020 and 2021 2020 Annual Q1 Q2 Q3 Q4 2020 2021 Real GDP (Percentage change from preceding quarter)a -0.9 -11.8 5.4 2.5 n.a. n.a. Real GDP (Percentage change, annual rate)a -3.5 -39.6 23.5 10.5 -5.6b 2.8b GDP (Trillions of dollars) 21.6 19.1 20.1 20.7 20.4 21.3 Unemployment Rate (Percent) 3.8 14.0 16.0 11.7 11.4 10.1 Interest Rate on Three-Month Treasury Bills (Percent) 1.1 0.1 0.1 0.1 0.4 0.1 Interest Rate on Ten-Year Treasury Notes (Percent) 1.4 0.6 0.7 0.7 0.8 0.7 GDP = gross domestic product; n.a. = not applicable.



a. Real values are nominal values that have been adjusted to remove the effects of changes in prices.



b. Data are shown on a fourth-quarter-to-fourth-quarter basis.

The Labor Market. The unemployment rate is projected to average 15 percent during the second and third quarters of 2020, up from less than 4 percent in the first quarter. The unemployment rate is the number of jobless people who are available for and seeking work, expressed as a percentage of the labor force. The increase in that rate in the second and third quarters reflects the net effect of a projected loss of nearly 27 million in the number of people employed and the exit of roughly 8 million people from the labor force.

Reflecting that reduction in the labor force, the labor force participation rate—that is, the percentage of people in the civilian noninstitutionalized population who are at least 16 years old and who are either working or seeking work—is projected to decline from 63.2 percent in the first quarter of this year to 59.8 percent in the third quarter. As a result, the employment-to-population ratio is projected to decline by about 10 percentage points over that same period.

The labor market is expected to improve after the third quarter, with a rebound in hiring and a significant reduction in furloughs as the degree of social distancing diminishes—leading to an increase in business activity and an increase in the demand for workers. In particular, the unemployment rate is projected to decline to 9.5 percent by the end of 2021. Under that projection, the unemployment rate at the end of 2021 would be about 6 percentage points higher than the rate in CBO’s economic projection produced in January 2020, and the labor force would have about 6 million fewer people.

Interest Rates. Interest rates on Treasury securities are expected to remain quite low through 2021, largely as a result of continued weakness in economic activity, actions taken by the Federal Reserve in response to that weakness, and an increase in demand for low-risk assets among financial market participants. Those factors are expected to more than offset upward pressure on rates from greater federal borrowing. The interest rate on 3-month Treasury bills is expected to remain near 0.1 percent, whereas the interest rate on 10-year Treasury notes is expected to rise gradually from its current level of 0.6 percent, averaging 0.7 percent in 2021. Under that projection, the interest rate on 10-year Treasury notes at the end of 2021 would be roughly 1.6 percentage points lower than the rate in CBO’s economic projection produced in January 2020.

Uncertainty. These preliminary projections, which are subject to enormous uncertainty, reflect information from a number of sources, including high-frequency indicators, private-sector forecasts, and projections of the extent of social distancing derived from analysis of a range of scenarios for the future course of the pandemic. High-frequency indicators include more than 24 million new unemployment insurance claims reported since mid-March. Since social distancing began in early March, new information has generally suggested a worsening outlook, and private-sector forecasts have been revised repeatedly in that direction. CBO’s projections fall within the wide range of views in those private forecasts but are closer to those that show greater near-term economic weakness.

CBO’s projections incorporate an expectation that the current extent of social distancing across the country will continue—on average and with regional variation—through June. The agency’s projections also include the possibility of a reemergence of the pandemic. To account for that possibility, social distancing is projected to continue, although to a lesser degree, through the first half of next year. In particular, the degree of social distancing is projected to diminish by roughly 75 percent, on average, during the second half of this year relative to the degree in the second quarter and then to further diminish in the first half of next year. To develop those projections, CBO examined an array of outside projections of the pandemic by academic institutions, government agencies, and other research groups. Those efforts pointed to a wide range of possible outcomes. In CBO’s assessment, the agency’s projection of the extent of social distancing is consistent with a pandemic projection in the center of that range.

A Preliminary Look at Federal Deficits and Debt

CBO has taken an early look at changes to federal deficits in fiscal years 2020 and 2021 and the associated borrowing to fund the government. The agency will scrutinize its projections of federal revenues and spending over the next several months; the budgetary outlook in the updated baseline CBO releases later this year may be notably different from the estimates described here.

As a result of recent events and legislation, deficits are projected to be significantly larger in 2020 and 2021 than in 2019, with sharply lower revenues and substantially higher noninterest spending. Even with increased federal borrowing, declines in interest rates mean that net interest outlays will decline. Overall, if laws currently in place governing spending and revenues generally remained unchanged and no significant additional emergency funding was provided, the federal deficit would be roughly $3.7 trillion in fiscal year 2020 and $2.1 trillion next year, CBO estimates. In CBO’s March baseline projections, deficits were just over $1 trillion in each of those years.

With the expected weakness in economic output and the larger federal deficits, the deficit would be 17.9 percent of GDP in 2020 and 9.8 percent of GDP in 2021, CBO projects, compared with 4.6 percent in 2019. The deficit relative to GDP is projected to be 13 percentage points higher in 2020 and about 5 percentage points higher in 2021 than in CBO’s March baseline projections.

Federal debt held by the public would be 101 percent of GDP by the end of fiscal year 2020 and would grow to 108 percent of GDP at the end of 2021, compared with 79 percent at the end of fiscal year 2019. Debt relative to GDP is projected to be 20 percentage points higher at the end of 2020 and 26 percentage points higher at the end of 2021 than in CBO’s March baseline projections.

Phillip L. Swagel is CBO’s Director.