[C]onsumer spending has been lower in the past year than the levels that would normally occur given consumers’ income and wealth—suggesting that other factors, such as pessimism about the prospects for income growth, may be restraining spending. As an example, for much of 2011 so far, only about 10 percent of consumers have expected to see real gains in their income in the year ahead, matching a level of pessimism last seen in 1980.
The CBO also predicts that out gross domestic product (GDP) will grow 2.4% in 2011 and 2.6% in 2012. But the CBO also stresses that those numbers are probably too optimistic since their economic analyses was conducted in early July before a slew of bad economic news.
Since that time Standard and Poor’s downgraded the United States’ credit rating, the Dow Jones is down nearly 12%, and the Bureau of Economic Analysis reported the that real GDP grew at an average annual rate of 0.8 percent in the first half of calendar year 2011 – more than a full point below the 1.9 percent estimate the CBO used.
The CBO even raises the possibility of another recession:
The slowing of growth in U.S. output during the first half of 2011 might portend the onset of another recession. One possible path to a new recession would be a self-reinforcing downward spiral in which reduced hiring led to weaker growth of household income and diminished consumer and busi- ness confidence, which in turn led to lower spending by households and businesses and thus less need for workers and less hiring. Stock prices could continue to fall, reduc- ing households’ wealth and confidence. In addition, problems in housing and mortgage markets could persist longer than anticipated in CBO’s forecast, which could push down house prices further, prolong problems in the financial system, and provide additional restraint on consumer spending and residential construction. Under those conditions, the income and confidence of busi- nesses and households would decline further, and a cycle of self-reinforcing adjustments such as those described above could drive the economy into recession again.
