05/04/2012 10:57 am ET | Updated Jul 04, 2012

Forecasting for Failure

An interesting find today when I was looking for something else in the FRED databases: the Congressional Budget Office is forecasting the slowest real recovery in the post-war era, and given trend inflation which does not rise above 2 percent, the slowest nominal recovery in the post-war era.

What these forecast data tell us is that the CBO expects the trend "potential" rate of real growth -- growth in the actual production of goods and services -- to rise slowly from now until 2016 to 2.6 percent year-over-year. In the interim, trend real growth is supposed to be below 2 percent; this is the lowest on record, and a long low stretch at that.

Moreover, the CBO doesn't seem to expect the Fed to do anything much about it. In tune with the Fed's forecasts, which show inflation slowly rising to the ceiling "target" of 2 percent, the CBO expects the trend inflation rate to hover around 1.8 percent. This reflects a substantial asymmetry between overshooting and undershooting the Fed's inflation target.

What do you get when you put the two -- historically low real growth, muted inflation -- together? The slowest sustained period of NGDP growth on record. In fact, we do not return to the NGDP trend growth rate of 5 percent we seemed to have to maintain from 1992 to 2007. Although the recovery from the 2000 recession was weak, this recovery could be different -- in that, when it comes to the level of NGDP, the CBO is effectively anticipating none.

This graph, expressed in logarithms of NGDP, suggests that the slow growth rates above represent a permanent adjustment downwards of the NGDP level path, with the CBO's trend estimate declining slowly to close the NGDP gap. Never mind, I suppose, that this recession is nominal, not real, and boils down to a collapse in spending in the aggregate and demand in current dollars.