WASHINGTON (Reuters) - The slowing U.S. economy is unlikely to sink into an election-year recession and an economic rebound could begin as early as next year as housing and financial market turmoil fades, the Congressional Budget Office forecast on Wednesday.
In the meantime, the U.S. budget deficit will grow to $219 billion this year, up from the $163 billion registered last year, according to a CBO report submitted to Congress.
But that forecast by Congress' nonpartisan budget analyst does not include the cost of an economic stimulus measure that is quickly moving through Congress and could cost around $150 billion or more. The deficit projection for fiscal 2008, which ends September 30, also does not include more money Congress is likely to approve this year for the war in Iraq.
While CBO noted an elevated risk of recession, its outlook was weighted more toward the United States working through its current economic problems and escaping a full-blown recession.
"Although recent data suggest that the probability of a recession in 2008 has increased, CBO does not expect the slowdown in economic growth to be large enough to register as a recession," CBO said.
"CBO expects the economy to rebound after 2008, as the negative effects of the turmoil in the housing and financial markets fade," the semi-annual budget and economic report said.
Surveys of U.S. employers, CBO said, so far do not suggest they plan large future reductions in hiring. However, CBO noted that "such labor-market indicators could deteriorate suddenly."
House Budget Committee Chairman John Spratt, a South Carolina Democrat, said the CBO report offered "some sobering news" for the U.S. economy.
"CBO shows the deficit for fiscal year 2008 is larger than the deficit for fiscal year 2007," Spratt noted, adding, "Under (Bush) administration policies, the $5.6 trillion (budget) surplus projected in 2001 has collapsed and been replaced by record deficits, which complicate our response to the current slowdown."
That slowdown will bring rising unemployment this year, a presidential and congressional election year, CBO forecast.
JOBLESS
The jobless rate, currently at 5 percent, is expected to average 5.1 percent this year, but rise to about 5.3 percent by the end of 2008, around the time voters in November will pick a new U.S. president and decide whether Democrats continue their majority in the U.S. House of Representatives and Senate.
CBO said it sees an average 5.4 percent unemployment rate next year and an average 4.9 percent a year in 2010-13.
CBO envisions a $198 billion budget deficit in fiscal 2009 and sees the deficit rising to $241 billion in 2010.
CBO, which bases its estimates on existing law, forecast a fiscal 2011 deficit of $117 billion and a budget surplus of $87 billion in 2012. But that assumes President George W. Bush's 2001 and 2003 tax cuts expire at the end of 2010 and that a temporary measure to fix the alternative minimum tax also expires.
In August, CBO predicted the fiscal 2008 budget deficit would be $155 billion. That was before the pinch of an unfolding economic slowdown became apparent.
CBO said it sees interest rates on Treasury securities remaining low this year and increasing in 2009 as the economy emerges from its current difficulties.
CBO said the weak U.S. dollar and relative economic strength of U.S. trading partners should boost exports and help offset the sluggishness in domestic demand.
It also said emerging economies have become increasingly less dependent on U.S. demand to fuel their economies and as a result have become less vulnerable to slowdowns in the U.S. economy.
Consumer spending, CBO said, is likely to fall off, curtailed by a drop in housing wealth (home equity), increased costs for borrowing, the high price of oil and slower growth of real income.
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