Analysis: Obama’s budget sees next president inheriting healthy economy

WASHINGTON – The economic assumptions underlying President Barack Obama’s proposed budget for the fiscal year starting Oct. 1 are fairly optimistic for the near term, although weaker than projections made in the mid-session review in July.

The White House is counting on growth in the world’s largest economy to pick up this year and next, while the job market stays strong and the inflation rate rebounds. The handoff from Obama will give the next president a good starting point, certainly better than what he started with, according to Mark Zandi, chief economist at Moody’s Analytics Inc.

“Very clearly, it is a much better economy than when Obama took office,” Zandi said before the budget was released Tuesday in Washington. Back in 2009, “the floor had fallen off from under the economy,” and now, wage growth is improving, house prices have recovered and the fiscal situation is “less dire.”

One caveat: The budget’s economic assumptions are based on information available through mid-November 2015. An administration official told reporters that the assumptions haven’t changed since then.

If last year is any guide, the estimates in the White House’s latest fiscal proposal bear watching for 2016. The administration got it almost right on unemployment, and wasn’t too far off on growth in 2015.

The U.S. economy has come a long way since the days of the recession, and the Obama administration expects better growth in the president’s final year in office. Gross domestic product after adjusting for inflation will expand 2.6 percent in the current calendar year and in 2017, the budget estimates showed. That’s faster than last year’s 2.4 percent, which matched 2014 as the strongest performance since 2010.

The budget projections are also more upbeat than Wall Street: The median forecast of economists compiled by Bloomberg showed GDP would expand an average 2.4 percent in 2016 and 2.3 percent next year.

While the administration’s forecasts made in mid-November were in line with other estimates at the time, projections have since deteriorated as emerging markets cool and commodity prices slump. For example, those polled by Blue Chip Economic Indicators this month projected the U.S. economy would grow 2.1 percent in 2016, down from a January forecast of 2.5 percent.

The labor market has made strides under Obama, with the jobless rate falling to 4.9 percent in January, the lowest since February 2008, according to Labor Department data released on Feb. 5.

Further improvement is in the cards for the next few years. The White House estimates the unemployment rate will average 4.7 percent in this calendar year, and fall to 4.5 percent in 2017, before gradually returning to its long-run rate of 4.9 percent in 2023. That’s the same projection as in the mid-session report for the rate the administration considers consistent with steady inflation.

The consumer price index, representing the cost of living for Americans, will increase 1.5 percent in this calendar year, the budget estimates showed. While that’s a pickup from the paltry 0.1 percent gain posted in 2015, the projection is slower than the 1.9 percent projected in the mid-session review released in July. The CPI will rise 2.1 percent in 2017 and move to a longer-run 2.3 percent advance from 2021 through 2026.

Low inflation has been a boon for Americans, especially in a period when wages were sluggish. At the same time, the lack of price pressures is on the Federal Reserve’s radar, and policy makers have said they expect inflation to return toward their 2 percent goal as headwinds such as falling oil prices fade. The central bank prefers a different measure of inflation based on consumption. Based on that, inflation hasn’t met its target since April 2012.

The president’s budget projects a 2016 deficit of $616 billion, or 3.3 percent of GDP, which would be an increase from last year’s 2.5 percent that was the smallest share since 2007. The shortfall then shrinks as a share of the economy and stays below 3 percent through 2026, even as the overall dollar amount of the deficit climbs to $793 billion in 2026.

For context, the deficit was a record $1.4 trillion in 2009, the year Obama took office, and by the middle of that year, the U.S. pulled out of the worst recession since the Great Depression.