Forecast Minus Actual Growth in Inflation-Adjusted Output: Two-Year Forecasts

Percentage-Point Difference in Annual Growth Rates

-4

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

6

4

2

0

-2

Administration

CBO

Blue Chip Consensus

CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

CBO

CBO’s Economic

Forecasting Record:

2013 Update

JANUARY 2013
CBO

Note

Some of the figures have white vertical bars that indicate the duration of recessions. 

(A recession extends from the peak of a business cycle to its trough.)

Pub. No. 4431
Contents

CBO

Summary 1

Introduction 5

Measuring the Quality of Forecasts 6

Limitations of Forecast Evaluations 6

Some Sources of Forecasting Error 7

Business Cycle Turning Points 7

Changes in Productivity Trends 7

Changes in Crude Oil Prices 10

Revisions to Historical Data 10

CBO’s Two-Year Forecasts 10

Growth in Output 12

BOX: COMPARISON OF TWO-YEAR FORECASTS BY CBO AND THE FEDERAL RESERVE 14

Inflation 18

Interest Rates 21

Wages and Salaries 27

CBO’s Five-Year Forecasts 30

Growth in Output 32

Inflation 32

Wages and Salaries 35

Appendix: Forecast and Historical Data 41

List of Tables and Figures 45

About This Document 46
CBO

Summary

For more than three decades, the Congressional Budget Office (CBO) has prepared economic forecasts that 

underlie the agency’s projections for the federal budget 

and cost estimates for proposed federal legislation. In particular, forecasts of output, income, inflation, and interest 

rates play a significant role in the agency’s budgetary analysis; for example, projections of wages and salaries are 

used to forecast individual income tax receipts.

CBO regularly evaluates the quality of its economic 

forecasts by comparing them with the economy’s actual 

performance and with forecasts by the Administration 

and the Blue Chip consensus—an average of about 

50 private-sector forecasts. Such comparisons indicate the 

extent to which uncertainty and imperfect information 

may have caused CBO to “miss” patterns or turning 

points in the economy. They also identify areas where 

CBO has tended to make larger errors or less accurate 

forecasts than other analysts.

How Does CBO’s Forecasting Record Compare with 

Those of the Administration and the Blue Chip

Consensus?

CBO’s forecasts generally have been comparable in quality with those of the Administration and the Blue Chip

consensus. When CBO’s projections have proved inaccurate by large margins, the errors have tended to reflect difficulties shared by other forecasters. 

Do CBO’s Forecasts Exhibit Notable Bias? 

A simple and widely used indicator of statistical bias is 

the mean error—the average tendency of a forecast to be 

low or high over an entire period. In general, CBO’s forecasts and those by the Administration and the Blue Chip

consensus have had similar mean errors. Specifically, 

CBO’s evaluation finds this:

 For CBO’s forecasts that look two years ahead, the 

mean errors have generally been very small. The 

agency’s forecasts have shown slight tendencies to 

overestimate future interest rates and wages and salaries (see Summary Figure 1).

 For CBO’s forecasts that look five years ahead, the 

mean errors imply a slightly stronger tendency to overestimate inflation compared with that of the agency’s 

two-year forecasts—which largely accounts for higher 

mean errors for growth in nominal output and in 

wages and salaries. In other respects, the mean errors 

generally resemble those for forecasts that look two 

years ahead. 

How Accurate Are CBO’s Forecasts?

Accuracy is the degree to which forecast values are dispersed around actual outcomes. One widely used measure 

of accuracy is the root mean square error. By that measure, the forecasts by CBO, the Administration, and the 

Blue Chip consensus have been about equally accurate 

over two-year periods (see Summary Figure 2) as well as 

over five-year periods. CBO’s evaluation finds this:

 Among two-year forecasts by CBO since the early 

1980s, forecast values deviated from actual outcomes 

by 1.4 percentage points per year for real (inflationadjusted) output growth and by 0.8 percentage points 

per year for inflation in the consumer price index. 

 Among five-year forecasts by CBO since the early 

1980s, forecast values deviated from actual outcomes 

by 1.2 percentage points per year for real output 

growth and by 0.6 percentage points per year for inflation in the consumer price index. 
2 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE JANUARY 2013

CBO

Summary Figure 1.

Mean Error for Two-Year Forecasts

(Percentage points)

Sources: Congressional Budget Office; Office of Management and Budget; and Aspen Publishers, Blue Chip Economic Indicators.

Notes: The mean error is the arithmetic average of the forecasting errors. To compare forecast and actual data, annual averages were 

computed for growth rates, inflation rates, interest rates, and wages and salaries as a share of output.

Errors are forecast values minus actual values; therefore, a positive error is an overestimate. 

CPI = consumer price index; GDP = gross domestic product; n.a. = not applicable (the Blue Chip consensus does not include a 

forecast of wages and salaries).

a. The Blue Chip consensus is the average of approximately 50 private-sector forecasts.

b. The gross national product price index was forecast before 1992; the GDP price index was forecast from 1992 onward.

c. Forecasts of Moody's Aaa corporate bond rate were used for the years in which the interest rate on 10-year Treasury notes was not 

forecast: 1984 and 1985 for CBO's forecasts and 1984 through 1995 for the Blue Chip consensus forecasts.

Change in Wages and Salaries as a

Share of Output (1980–2010)

Growth in Wages and

Salaries (1980–2010)

Interest Rate on 10-Year

Treasury Notes (1984–2010)

c

Real (Inflation-adjusted)

Interest Rate on Three-Month

Treasury Bills (1982–2010)

Interest Rate on Three-Month

Treasury Bills (1982–2010)

Difference Between

Inflation in the CPI and the

GDP Price Index (1982–2010)

b

Inflation in the Consumer

Price Index (1982-2010)

Growth in Nominal Output

(1982–2010)

Growth in Real Output

(1982–2010)

-0.3 -0.2 -0.1 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8

n.a.

n.a.

CBO

Blue Chip Consensusa

Administration
SUMMARY CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE 3

CBO

Summary Figure 2.

Root Mean Square Error for Two-Year Forecasts

(Percentage points)

Sources: Congressional Budget Office; Office of Management and Budget; and Aspen Publishers, Blue Chip Economic Indicators.

Notes: The root mean square error is calculated by first squaring the errors, then taking the square root of the arithmetic average of the 

squared errors. To compare forecast and actual data, annual averages were computed for growth rates, inflation rates, interest rates, 

and wages and salaries as a share of output.

Errors are forecast values minus actual values; therefore, a positive error is an overestimate. 

CPI = consumer price index; GDP = gross domestic product; n.a. = not applicable (the Blue Chip consensus does not include a 

forecast of wages and salaries).

a. The Blue Chip consensus is the average of approximately 50 private-sector forecasts.

b. The gross national product price index was forecast before 1992; the GDP price index was forecast from 1992 onward.

c. Forecasts of Moody’s Aaa corporate bond rate were used for the years in which the interest rate on 10-year Treasury notes was not 

forecast: 1984 and 1985 for CBO’s forecasts and 1984 through 1995 for the Blue Chip consensus forecasts.

Change in Wages and Salaries as a

Share of Output (1980–2010)

Growth in Wages and

Salaries (1980–2010)

Interest Rate on 10-Year

Treasury Notes (1984–2010)

Real (Inflation-adjusted)

Interest Rate on Three-Month

Treasury Bills (1982–2010)

Interest Rate on Three-Month

Treasury Bills (1982–2010)

Difference Between

Inflation in the CPI and the

GDP Price Index (1982–2010)

Inflation in the Consumer

Price Index (1982-2010)

Growth in Nominal Output

(1982–2010)

Growth in Real Output

(1982–2010)

0 0.5 1 1.5 2 2.5

n.a.

n.a.

b

c

CBO

Blue Chip Consensus a

Administration
4 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE JANUARY 2013

CBO

What Are Some Sources of Forecasting Errors?

Sources of large forecasting errors have included the difficulty of predicting:

 Turning points in the business cycle—the beginning 

and end of recessions; 

 Changes in trends in productivity; and 

 Changes in crude oil prices. 

In addition, revisions to the historical data (on output 

and income, for example) that forecasters use for economic projections can complicate the task of interpreting 

forecasting errors. CBO used current vintages of historical data to compute the forecasting errors and statistics. 

Had the revised data been available to forecasters, rather 

than the original information that was available when the 

forecasts were produced, the forecasts themselves would 

have been different. Despite that complication, recently 

published data present a simple and consistent point of 

comparison for evaluating forecasts by CBO and others.

How Do CBO’s Assumptions About Fiscal Policy 

Affect Forecasting Errors?

CBO constructs its economic projections under the 

assumption that federal fiscal policy will follow current 

law, thereby providing a benchmark for lawmakers as 

they consider potential changes in the law. In contrast, 

the Administration’s forecasts assume the adoption of 

policies reflected in the President’s proposed budget. 

Forecasters in the private sector (represented in the Blue 

Chip consensus) form their own assumptions about the 

future stance of federal fiscal policy, which may anticipate 

changes in law. 

Differences between forecasts, and thus differences in 

forecasting errors, sometimes arise from different 

assumptions about fiscal policy, particularly when policymakers are considering major changes to current law. For 

example, in 2009 and 2010, different fiscal policy 

assumptions caused CBO’s two-year forecasts of real 

output growth to diverge noticeably from those of the 

Administration and the Blue Chip consensus.
CBO

CBO’s Economic Forecasting Record:

2013 Update

Introduction

Released on a regular basis since 1976, the Congressional 

Budget Office’s (CBO’s) macroeconomic forecast is an 

input for the agency’s projections for the federal budget 

and cost estimates for proposed federal legislation. For 

example, projections of wages and salaries feed into the 

forecast of individual income tax receipts. 

CBO regularly evaluates the quality of its economic 

forecasts by comparing them with the economy’s actual 

performance and with forecasts by the Administration 

and the Blue Chip consensus (an average of approximately 

50 private-sector forecasts that is published periodically 

in the Blue Chip Economic Indicators).1

 Such comparisons 

help CBO improve its economic projections. Specifically, 

they indicate the extent to which uncertainty and imperfect information—factors that affect all forecasters—may 

have caused CBO to “miss” patterns or turning points in 

the economy.2

 They also identify areas where CBO has 

tended to make larger errors or less accurate forecasts 

than other analysts—perhaps implying that the agency 

has not effectively used available information. Comparisons with the Blue Chip consensus forecast are particularly helpful in that regard, because the variety of forecasts 

it embodies is produced from a broader blend of sources 

and methods than can be expected from any single forecaster. Consequently, over time, the Blue Chip consensus 

forecasts may provide better estimates than those by any 

single forecaster.3

Despite their value, comparisons of forecasting errors 

can be misleading when forecasts are made for different 

purposes. In particular, forecasters in the private sector 

attempt to predict the future stance of federal fiscal 

policy, and the Administration’s forecasts assume the 

adoption of the fiscal policy reflected in the President’s 

proposed budget. CBO, however, is required to assume 

that fiscal policy in the future will reflect the provisions in 

current law, an approach that derives from the agency’s 

responsibility to provide a benchmark for lawmakers as 

they consider proposed changes in law. Forecasting errors 

may be driven by those different assumptions, particularly when policymakers are considering major changes in 

the fiscal policy embedded in current law.4

This report evaluates CBO’s macroeconomic forecasts 

over two-year and five-year periods. The forecasts 

included in this evaluation were originally published in 

the early months of the years 1976 through 2010. (Twoyear average forecasts published in early 2011 could not 

be included because the latest full-year historical data do 

not extend beyond 2011 for most indicators.) 

Relative to the forecasting record that CBO published in 

2010, this evaluation now includes two-year forecasts 

conducted in 2009 and 2010 and five-year forecasts conducted in 2006 and 2007.5

 Those additional forecasts 

did not significantly alter findings from the previous 

forecasting record. In general, the evaluations indicate 

1. The appendix to this report gives further details on the choice of 

historical time-series data and on the sources of forecast data for 

the comparisons.

2. See David Reifschneider and Peter Tulip, Gauging the Uncertainty 

of the Economic Outlook from Historical Forecasting Errors, Finance 

and Economics Discussion Series Working Paper No. 2007-60 

(Washington, D.C.: Board of Governors of the Federal Reserve 

System, November 2007).

3. See, for example, Andy Bauer and others, “Forecast Evaluation 

with Cross-Sectional Data: The Blue Chip Surveys,” Economic 

Review, vol. 88, no. 2 (Federal Reserve Bank of Atlanta, 2003), 

pp. 17–31; Henry Townsend, “A Comparison of Several Consensus Forecasts,” Business Economics, vol. 31, no. 1 (January 1996); 

and Robert Clemen, “Combining Forecasts: A Review and 

Annotated Bibliography,” International Journal of Forecasting, 

vol. 5, no. 4 (1989), pp. 559–583.

4. Different assumptions about monetary policy also can create 

differences between CBO’s forecasts and other forecasts. CBO’s 

assumptions about monetary policy reflect the economic environment that CBO expects under the fiscal policy specified in current 

law. 

5. See Congressional Budget Office, CBO’s Economic Forecasting 

Record: 2010 Update (July 2010).
6 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE JANUARY 2013

CBO

that the quality of CBO’s two- and five-year forecasts is 

similar to that of other organizations.

Measuring the Quality of Forecasts

Like CBO’s earlier studies of its economic forecasts, this 

evaluation focuses on two indicators of quality: statistical 

bias and accuracy. Other characteristics of forecast 

quality—such as the efficiency with which a forecast uses 

available information—are harder to assess.6

Statistical Bias. Statistical bias indicates the tendency of a 

forecast to err in a certain direction. To measure statistical 

bias, CBO used the mean error—the arithmetic average 

of the forecasting errors, which is the simplest and most 

widely used measure. Because it is a simple average, however, underestimates and overestimates offset one another. 

As a result, the mean error imperfectly measures the quality of a forecast: A small mean error would result if all of 

the errors were small or if large overestimates and underestimates generally balanced one another. As an alternative to the mean error measure, several studies by analysts 

outside of CBO have used more elaborate techniques to 

test for bias in the agency’s forecasts.7

Accuracy. The accuracy of a forecast is the degree to 

which forecast values are dispersed around actual outcomes. Narrower dispersion indicates greater accuracy. 

CBO used two measures of accuracy in its evaluation: 

The mean absolute error—the average of the forecasts’ 

errors without regard to arithmetic sign—does not allow 

underestimates and overestimates to offset each other, in 

contrast with the mean error. The root mean square error 

also shows the size of the error without regard to sign, but 

it gives greater weight to larger errors.8

Limitations of Forecast Evaluations

There are several reasons for caution in drawing 

conclusions from this evaluation of CBO’s forecasts:

 Historical track records only weakly indicate the possible direction or size of inaccuracies in the future. To 

some extent, that fact results from changes in procedures used to develop economic forecasts by CBO and 

other analysts over the past three decades. Moreover, 

the forecasters included in the Blue Chip consensus 

have varied over time.

 When preparing forecasts, CBO, unlike private forecasters and the Administration, does not assume any 

future changes in federal fiscal policy other than those 

prescribed in current law.9

 The various Administration forecasts normally include 

the projected economic effects of those Administrations’ policy proposals. The various private forecasters 

included in the Blue Chip survey make their own 

assumptions about fiscal policy, but the survey does 

not report them.

 The common practice of revising statistical data could 

mean that forecasters make predictions about one

6. For studies that have examined the relative efficiency of CBO’s 

economic forecasts, see Michael T. Belongia, “Are Economic Forecasts by Government Agencies Biased? Accurate?” Review, vol. 70, 

no. 6 (Federal Reserve Bank of St. Louis, November/December 

1988), pp. 15–23; and Stephen M. Miller, “Forecasting Federal 

Budget Deficits: How Reliable Are U.S. Congressional Budget 

Office Projections?” Applied Economics, vol. 23 (December 1991), 

pp. 1789–1799. Although both studies identify information that 

might have been used to make CBO’s forecasts more accurate, 

they rely on statistics that are valid only when sample sizes are 

larger than those used in the evaluations. Moreover, although 

statistical tests can identify sources of inefficiency in a forecast 

after the fact, they generally do not indicate how such information 

could be used to improve forecasts when they are being made.

7. One such alternative approach to testing a forecast for bias is 

based on linear regression analysis of actual values against forecast 

values. For details of that method, see Jacob A. Mincer and Victor 

Zarnowitz, “The Evaluation of Economic Forecasts,” in Jacob A. 

Mincer, ed., Economic Forecasts and Expectations: Analysis of Forecasting Behavior and Performance (Cambridge, Mass.: National 

Bureau of Economic Research, 1969). Studies that have used that 

method to evaluate short-term forecasts published by CBO and 

the Administration have not found statistically strong evidence of 

bias. See, for example, George A. Krause and James W. Douglas, 

“Institutional Design Versus Reputational Effects on Bureaucratic 

Performance: Evidence from U.S. Government Macroeconomic 

and Fiscal Projections,” Journal of Public Administration Research 

and Theory, vol. 15, no. 2 (April 2005), pp. 281–306; J. Kevin 

Corder, “Managing Uncertainty: The Bias and Efficiency of Federal Macroeconomic Forecasts,” Journal of Public Administration 

Research and Theory, vol. 15, no 1 (January 2005), pp. 55–70; 

and Belongia, “Are Economic Forecasts by Government Agencies 

Biased? Accurate?” For a more elaborate study of bias that 

included CBO’s forecasts among a sizable sample, see Corder, 

“Managing Uncertainty”; and David Laster, Paul Bennett, and In 

Sun Geoum, Rational Bias in Macroeconomic Forecasts, Staff 

Report No. 21 (Federal Reserve Bank of New York, March 1997).

8. The root mean square error is calculated by first squaring the 

errors and then taking the square root of the arithmetic average of 

the squared errors. Squaring the errors places greater weight on 

larger errors.

9. The purpose of current-law assumptions in CBO’s economic 

forecasts is explored in Congressional Budget Office, What Is a 

Current-Law Economic Baseline? (June 2005).
JANUARY 2013 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE 7

CBO

concept of an economic variable and the statistical 

agencies that compile those data ultimately report on a 

materially different concept. For example, in 1999, 

the Bureau of Economic Analysis (BEA) redefined 

business and government spending on computer software as investment, which led to significant revisions 

to historical estimates of investment, particularly during much of the 1990s.10

Some Sources of Forecasting Error

The physicist Niels Bohr is credited with saying that 

“Prediction is very difficult, especially if it’s about the 

future.” There are indeed many ways that economic forecasts can go wrong. Some key sources of error include the 

difficulties of predicting turning points in the business 

cycle, changes in productivity trends, and changes in 

crude oil prices. As well, revisions to historical data 

used by forecasters can complicate the interpretation of 

forecasting error.

Business Cycle Turning Points

Peaks and troughs (or turning points) in the business 

cycle mark the beginning and end of recessions, which are 

periods of significant contraction in economic activity. 

Forecasts by CBO, the Administration, and the Blue Chip

consensus have made large overpredictions of real (inflation-adjusted) output growth before each recession since 

1976, with the exception of the 1980 recession (see 

Figure 1). Forecasting errors tend to be large around business cycle peaks (when a recession begins) for a number 

of reasons:

 Recessions are sometimes prompted by events or 

shocks that cannot be reasonably predicted by forecasters. For example, in August 1990, the Iraqi invasion of Kuwait led to a spike in oil prices and a drop in 

consumer confidence, which probably contributed to 

the recession that followed.

 Economists cannot be sure that a recession has begun 

until sufficient data are available. For example, the 

Business Cycle Dating Committee of the National 

Bureau of Economic Research (NBER) did not 

announce the December 2007 business cycle peak 

until 11 months later. For that reason, forecasters may 

“miss” a recession even after it has started.

 Business cycle turning points often occur during periods of high uncertainty. For example, in January 2008, 

one month after the business cycle peak, CBO 

reported, “The economic outlook this year is particularly vulnerable to uncertainty about the degree to 

which the problems in the housing and financial markets will spill over to affect other sectors of the economy. Growth in 2008 could be weaker than CBO 

expects if the turmoil in the financial markets leads to 

a more severe economywide curtailment of lending 

than CBO anticipates.” Under such uncertain conditions, widely different outcomes can appear equally 

probable, making it difficult to gauge whether an economic downturn is imminent.

Changes in Productivity Trends

Forecasts of productivity growth play a critical role in 

forecasting potential output, which is CBO’s estimate of 

the amount of output that the economy would produce 

with a high rate of use of its capital and labor resources. 

As such, CBO’s forecast of potential output shows how 

much the economy can sustainably grow during periods 

of expansion and determines the trajectory of gross 

domestic product (GDP) in the later years of the agency’s 

10-year forecasts. 

Labor productivity is the average real output per hour of 

work; by definition, real output equals labor productivity 

times the total number of labor hours worked. Some 

sources of growth in labor productivity include:

 Capital accumulation (that is, more tools, equipment, 

structures, and infrastructure),

 Education and skills development (also called investment in human capital), and

 Innovation (that is, the greater efficiency achieved 

through better tools, systems, or methods).

When forecasting productivity growth, CBO considers 

historical trends in capital accumulation and the effects of 

public policy on incentives to invest. Shifts in such trends 

may be difficult to identify until several years after the 

fact. Consequently, forecasters may make incorrect 

assumptions about the trajectory of productivity growth 

and, therefore, potential output growth.

10. Previously, business and government spending on software was 

considered to be the purchasing of an intermediate good—an 

input in the production process and not a component of gross 

domestic product.
8 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE JANUARY 2013

CBO

Figure 1.

Errors in Forecasting the Two-Year Growth of Real Output Near 

Business Cycle Peaks

(Percentage points)

Sources: Congressional Budget Office; Office of Management and Budget; Aspen Publishers, Blue Chip Economic Indicators; and Department 

of Commerce, Bureau of Economic Analysis (BEA).

Notes: Errors are forecast values minus actual values; therefore, a positive error is an overestimate. Date labels refer to the initial year of the 

two-year period.

Errors are shown for forecasts conducted near business cycle peaks in January 1980, July 1981, July 1990, March 2001, and 

December 2007, as defined by the Business Cycle Dating Committee of the National Bureau of Economic Research.

Real (inflation-adjusted) output is either real gross domestic product (GDP) or real gross national product (GNP). GNP differs from 

GDP primarily by including the capital income that residents earn from investments abroad and excluding the capital income that

nonresidents earn from domestic investment. GNP was forecast before 1992; GDP was forecast from 1992 onward. Errors are based 

on the most recent data reported by BEA.

All forecasts were issued in the first half of the initial year of the period or in December of the preceding year.

a. As a point of comparison, the mean absolute error is one indicator of the accuracy of forecasts over the 1982–2010 period, excluding 

those produced near a business cycle peak. The measure is the average of forecasting errors without regard to arithmetic sign.

b. As a point of comparison, the root mean square error is one indicator of the accuracy of forecasts over the 1982–2010 period, excluding 

those produced near a business cycle peak. The measure is calculated by first squaring the errors, then taking the square root of the 

arithmetic average of the squared errors.

Since the early 1970s, forecasting errors reveal two 

unexpected shifts in productivity trends (see Figure 2): 

 Following the 1973–1975 recession, labor productivity growth in the nonfarm business sector did not 

return to the previous postwar trend rate of about 

21⁄2 percent per year. Over the next two decades, productivity grew more slowly, by about 11⁄2 percent per 

year. Partly because most forecasters in the 1970s 

assumed that the productivity trend of the previous 

decades would prevail, their forecasts of real output in 

the mid- to late 1970s turned out to be too optimistic. 

Partly for the same reason, forecasters repeatedly 

underestimated inflation in the late 1970s.

 In the late 1990s, growth in labor productivity in 

the nonfarm business sector accelerated to nearly 

3 percent per year. In part because most forecasters 

underestimated, in several consecutive years, the trend 

rate of productivity growth, their predictions of the 

economy’s growth rate were too low and their predictions of inflation were too high.11 As the economy

1980 1981 1990 2001 2008 Mean Absolute

Error in

Other Years

Root Mean

Square Error in

Other Years

-1

0

1

2

3

4

5

a b

CBO

Blue Chip Consensus

Administration

11. See Spencer Krane, “An Evaluation of Real GDP Forecasts: 1996–

2001,” Economic Perspectives, vol. 27, no. 1 (Federal Reserve Bank 

of Chicago, 2003), pp. 2–21; and Scott Schuh, “An Evaluation of 

Recent Macroeconomic Forecast Errors,” New England Economic

Review (Federal Reserve Bank of Boston, January/February 2001), 

pp. 35–56.
JANUARY 2013 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE 9

CBO

Figure 2.

Labor Productivity and Hours

Sources: Congressional Budget Office; Department of Labor, Bureau of Labor Statistics.

Notes: Data show labor productivity and hours in the nonfarm business sector.

Data are annual and are plotted through 2011.

continued to perform above expectations, analysts put 

more effort into investigating the possible causes of 

the increase in productivity growth. Those investigations initially focused on the possible contribution of 

technological progress that improved and quickened 

the flow of information among producers and 

between producers and consumers. Using revised data 

on production and inputs to production, CBO now 

estimates that an increase in the amount of capital 

(buildings, equipment, and software) per worker—

sometimes called capital deepening—was the primary 

source of the faster growth in productivity in the late 

1990s.12

In addition to misestimating labor productivity, making 

incorrect assumptions about growth in labor hours may 

also cause large forecasting inaccuracies. In the early 

120

100

80

60

40

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

0

125

100

75

50

25

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

0

Real Output per Hour

Labor Hours

Trend Growth,

1947–1973

(2.6 percent)

Trend Growth,

1974–1995

(1.4 percent)

Trend Growth,

1996–2006

(2.9 percent)

Trend

Actual

(Index, 2005 = 100, log scale)

(Index, 2005 = 100, log scale)

12. See Congressional Budget Office, Labor Productivity: Developments Since 1995 (March 2007).
10 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE JANUARY 2013

CBO

2000s, for example, productivity continued to grow at 

the strong post-1995 rate; however, labor hours unexpectedly grew very little on average (see Figure 2 on 

page 9). As a result, forecasters tended to overestimate the 

growth of real output during that period.

Changes in Crude Oil Prices

Prices for crude oil have fluctuated over a wide range in 

the past 40 years, creating sizable shifts in the price of 

petroleum imports and sometimes in overall consumer 

prices (see Figure 3). The inflationary risk of those fluctuations largely stems from the fact that crude oil is an 

important energy source. In the United States, petroleum 

provides over 90 percent of the energy used for transportation and accounts for more than one-third of total 

energy consumption.13

At a fundamental level, the risk of large movements in 

crude oil prices stems from the fact that producers and 

consumers have limited capacity to adjust supply and 

demand quickly in response to changing market conditions.14 Fluctuations in oil prices are often difficult to 

forecast because markets for petroleum products can be 

sensitive to influences that are not reasonably predictable. 

In particular, sudden price changes have occurred because 

of political decisions or instability in oil-producing countries. During the 1973–1981 period, for example, oil 

prices spiked at the time of the Arab Oil Embargo (1973 

to 1974), the Iranian Revolution (1979), and the start of 

the Iran-Iraq War (1980).

In large part, CBO bases its forecasts of oil prices on the 

prices implied by oil futures contracts, adjusted for estimated economic conditions assuming federal fiscal policy 

as specified in current law. Although futures markets provide some predictive power, they are imperfect indicators 

of realized prices. 

Revisions to Historical Data

Forecasters rely on national data sets to project commonly used indicators of economic activity. Agencies like 

BEA estimate GDP and other economic indicators using 

accepted methods and statistical definitions and using 

data that they and others collect. As more information 

becomes available and as definitions and methodologies 

improve, published estimates are often revised. Some 

series, such as the consumer price index and interest rates 

examined in this paper, are not revised.

Revisions to historical data sometimes complicate the 

task of evaluating forecasts by making it difficult to assess 

the extent to which errors were derived from imperfect 

forecasting approaches as opposed to imperfect data. For 

example, BEA made several downward revisions to estimates of real GDP growth during the 2007–2009 recession (see Figure 4). When CBO conducted its January 

2009 baseline forecast, real GDP had reportedly fallen by 

0.5 percent (at an annual rate) in the third quarter of 

2008; however, revised data now show a 3.7 percent drop 

in that quarter. Similarly, current data show that average 

annual growth in real GDP was about 1 percentage point 

lower during the recession than forecasters knew in January 2010. Had CBO and other forecasters used revised 

data rather than original estimates, projections probably 

would have been different.

Changes to definitions and methodologies affect the 

comparability of current data and past forecasts. For 

example, in 1999, in addition to redefining business 

and government spending on computer software as 

investment, BEA adopted new price indexes for various 

categories of consumption. Largely as a result of those 

changes, estimated growth in real GDP increased over 

most of the post-World War II period. In particular, from 

1992 to 1998, average annual growth in real GDP was 

increased by 0.4 percentage points, and inflation in the 

GDP price index was decreased by 0.1 percentage 

points.15 Forecasts before 1999, of course, could not have 

anticipated those changes, so they used the definitions 

and methodologies that existed at the time.

CBO’s Two-Year Forecasts

CBO’s two-year forecasts have been about as accurate, as 

measured by the root mean square error, as those by the 

Administration and the Blue Chip consensus (see Table 1 

on page 13). The evaluation of those forecasts presented

13. See Energy Information Administration, Annual Energy Review 

2011 (September 2012), Figure 2.0.

14. In the near term, consumers are constrained by the energy 

efficiency of their homes, places of work, and modes of transportation; producers are constrained by their equipment, technology, 

and the availability and accessibility of natural resources. For additional discussion, see Congressional Budget Office, Energy Security 

in the United States (May 2012).

15. See Eugene P. Seskin, “Improved Estimates of the National 

Income and Product Accounts for 1959–98: Results of the 

Comprehensive Revision,” Survey of Current Business (December 

1999), pp. 15–43, www.bea.gov/scb/pdf/national/nipa/1999/

1299niw.pdf.
JANUARY 2013 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE 11

CBO

Figure 3.

Petroleum Prices and Consumer Inflation

Sources: Congressional Budget Office; Department of Labor, Bureau of Labor Statistics; Department of Commerce, Bureau of Economic 

Analysis.

Notes: Data are annual and are plotted through 2011.

CPI-U = consumer price index for all urban consumers.

a. The index for the price of petroleum imports is deflated by an index for consumer prices that excludes prices for food and energy.

b. In the CPI, major components of energy prices include motor fuel (which is primarily composed of petroleum products), electricity, and 

natural gas purchased from utilities.

here involves various economic outcomes, including 

growth in output (in both real and nominal terms), 

inflation, the difference between inflation in the consumer 

price index and the GDP price index, interest rates on 

3-month Treasury bills and 10-year Treasury notes, and 

changes in wages and salaries (a significant part of taxable 

income).16 (Box 1 on page 14 presents a comparison of 

CBO’s forecasts of real output growth and inflation over 

two-year periods with those of the Federal Reserve.)

0

0.4

0.8

1.2

1.6

2.0

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

0

4

8

12

-2

2

6

10

14

Price of Petroleum Importsa

Consumer Price Index With and Without Energy Pricesb

(Index, 2005 = 1)

(Percentage change)

CPI-U

CPI-U Without

Energy Prices

16. Tables showing the errors of each forecast are available as supplemental material on CBO’s Web site (www.cbo.gov).
12 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE JANUARY 2013

CBO

Figure 4.

Forecasts by CBO and Revisions to Values for Real Gross Domestic Product

(Percentage change from year ago)

Sources: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis.

Notes: Solid lines represent historical data that were available at the time each forecast was conducted. Dashed lines represent forecast data.

Real gross domestic product is the output of the economy adjusted to remove the effects of inflation.

Data are quarterly and are plotted through the fourth quarter of 2011.

Growth in Output

Two-year forecasts of output growth by CBO, the 

Administration, and the Blue Chip consensus have moved 

closely together over the past 30 years. As measured by 

the root mean square error, the projected two-year average growth rate of output (both real and nominal) by all 

three sets of forecasts deviated from the actual growth rate 

by roughly 11⁄2 percentage points between 1982 and 

2010. In large part, forecasting errors for output growth 

reveal forecasters’ difficulty in anticipating business cycle 

turning points and changing trends in productivity 

growth. 

Growth in Real Output. Forecasting errors over the period 

from 1976 to 1982 reflected the unusual economic 

developments of the time:

 Low productivity growth relative to the previous 

trend, 

 High rates of inflation exacerbated by sudden and 

unexpected movements in petroleum prices, and 

 The Federal Reserve’s monetary policy, which resisted 

those inflationary pressures and induced the two recessions that occurred between 1980 and 1982.17

In the late 1970s, CBO and the Administration, like 

most forecasters, had expected productivity growth to 

move back up to its earlier post-World War II trend, 

which contributed to slight overpredictions of the growth 

in real output. Early in 1980, CBO and the Administration anticipated the coming recession and produced 

relatively accurate forecasts that year. However, forecasts 

conducted in the next two years did not anticipate the 

advent and depth of the 1981–1982 recession, causing 

overpredictions of the growth in real output (see Figure 5 

on page 16).

In 1983 and 1984, economic activity recovered strongly 

from the 1981–1982 recession, with real output growing 

faster than expected by CBO, the Administration, and 

the Blue Chip consensus. In forecasts conducted during 

the 1983–1989 expansion, CBO and the Blue Chip

consensus underpredicted real output growth by 

roughly 1 percentage point, on average; in the Administration’s forecasts, underpredictions were notably lower, 

particularly during the latter half of the decade. 

-6

-4

-2

0

2

4

6

2006 2007 2008 2009 2010 2011

Current Actuals

January 2010

Actuals and

Forecast

January 2009

Actuals and

Forecast

17. The credit controls imposed in March 1980 contributed to the 

severity of the recession in that year. See Stacey L. Schreft, “Credit 

Controls: 1980,” Economic Review (Federal Reserve Bank of 

Richmond, November/December 1990), pp. 25–55. 
JANUARY 2013 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE 13

CBO

Table 1.

Summary Measures of Performance for Two-Year Forecasts

(Percentage points)

Sources: Congressional Budget Office; Office of Management and Budget; and Aspen Publishers, Blue Chip Economic Indicators.

Notes: Errors are forecast values minus actual values; therefore, a positive error is an overestimate.

CPI = consumer price index; GDP = gross domestic product; n.a. = not applicable.

a. The Blue Chip consensus is the average of approximately 50 private-sector forecasts.

b. The gross national product price index was forecast before 1992; the GDP price index was forecast from 1992 onward.

c. Forecasts of Moody's Aaa corporate bond rate were used for the years in which the interest rate on 10-year Treasury notes was not 

forecast: 1984 and 1985 for CBO's forecasts and 1984 through 1995 for the Blue Chip consensus forecasts.

Mean error -0.1 0.1 -0.1

Mean absolute error 1.1 1.2 1.1

Root mean square error 1.4 1.6 1.4

Mean error 0.1 0.4 0.3

Mean absolute error 1.1 1.2 1.1

Root mean square error 1.5 1.7 1.5

Mean error 0.2 0.1 0.2

Mean absolute error 0.7 0.7 0.7

Root mean square error 0.8 0.9 0.9

Mean error -0.1 -0.2 -0.1

Mean absolute error 0.3 0.4 0.4

Root mean square error 0.4 0.5 0.4

Mean error 0.6 0.3 0.6

Mean absolute error 1.0 1.1 1.0

Root mean square error 1.4 1.4 1.3

Mean error 0.4 0.2 0.4

Mean absolute error 1.0 1.0 1.0

Root mean square error 1.3 1.4 1.2

Mean error 0.4 0.1 0.4

Mean absolute error 0.6 0.8 0.7

Root mean square error 0.7 0.9 0.7

Mean error 0.5 0.7 n.a.

Mean absolute error 1.4 1.6 n.a.

Root mean square error 1.9 2.1 n.a.

Mean error 0.2 0.2 n.a.

Mean absolute error 0.8 0.8 n.a.

Root mean square error 1.0 1.0 n.a.

Blue Chip 

Difference Between Inflation in the CPI and the GDP Price Index (1982–2010)b

Interest Rate on Three-Month Treasury Bills (1982–2010)

Real Interest Rate on Three-Month Treasury Bills (1982–2010)

Interest Rate on 10-Year Treasury Notes (1984–2010)c

Growth in Wages and Salaries (1980–2010)

Change in Wages and Salaries as a Share of Output (1980–2010)

CBO Administration Consensusa

Growth in Real Output (1982–2010)

Growth in Nominal Output (1982–2010)

Inflation in the Consumer Price Index (1982–2010)
14 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE JANUARY 2013

CBO

Continued

Box 1.

Comparison of Two-Year Forecasts by CBO and the Federal Reserve

Like those by the Administration and the Blue Chip

consensus, forecasts by the Federal Reserve provide an 

informative point of comparison when evaluating the 

Congressional Budget Office’s (CBO’s) forecasts. But 

the Federal Reserve does not immediately release its 

two-year forecasts of interest rates or of wages and 

salaries, and it does not publish five-year forecasts. 

Therefore, CBO’s principal analysis for this report 

did not include the Federal Reserve’s forecasts. 

However, the Federal Reserve has published timely 

two-year forecasts of real output growth and inflation 

rates, allowing for a comparison of forecasts of those 

variables. 

Since 1979, the staff of the Board of Governors of the 

Federal Reserve System has regularly prepared 

detailed two-year macroeconomic forecasts for the 

Federal Open Market Committee (FOMC), the body 

responsible for conducting monetary policy. Those 

forecasts are released to the public on a delayed 

schedule—typically five years later. In conjunction 

with certain meetings of the FOMC, members of the 

committee—the Board of Governors and the presidents of the regional Federal Reserve Banks—also 

compile their own forecasts for selected economic 

indicators; the range and central tendency of those 

forecasts have been published in the minutes of the 

meetings in recent years. CBO’s comparison with the 

forecasts by the staff of the board covers 1979 

through 2007; a comparison with the central tendency of the FOMC members’ forecasts of real 

output and inflation in consumer prices covers 2008 

through 2010. All of the Federal Reserve’s forecasts 

used in this analysis were issued in January or February of the initial year of the forecast period or in 

December of the preceding year.

Growth in Real Output: Forecast Minus Actual

(Percentage points)

Sources: Congressional Budget Office; Board of Governors of the Federal Reserve System; and Department of Commerce, Bureau of 

Economic Analysis (BEA).

Notes: Errors are shown for forecasts of the average annual growth rate of real (inflation-adjusted) output over two-year periods. 

Date labels refer to the initial year of the two-year period.

Real output is either real gross domestic product (GDP) or real gross national product (GNP). Real GNP differs from real GDP 

primarily by including the capital income that residents earn from investments abroad and excluding the capital income that 

nonresidents earn from domestic investment. Real GNP was forecast before 1992; real GDP was forecast from 1992 onward. 

Errors are based on the most recent data reported by BEA.

From 2008 onward, growth rates were measured on a fourth-quarter-to-fourth-quarter basis.

All forecasts were issued in the first half of the initial year of the period or in December of the preceding year.

a. Before 2008, forecasts were prepared by the staff of the Board of Governors of the Federal Reserve System. Between 2008 

and 2010, the shaded band encompasses the central tendency of Federal Reserve forecasts. The central tendency reflects the 

forecasts of the members of the Board of Governors and the presidents of the Federal Reserve Banks without the three highest 

and three lowest projections

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

-3

-2

-1

0

1

2

3

4

5

CBO Federal Reservea
JANUARY 2013 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE 15

CBO

Box 1. Continued

Comparison of Two-Year Forecasts by CBO and the Federal Reserve

Inflation in Consumer Prices: Forecast Minus Actual

(Percentage points)

Sources: Congressional Budget Office; Board of Governors of the Federal Reserve System; Department of Labor, Bureau of Labor 

Statistics (BLS); Department of Commerce, Bureau of Economic Analysis (BEA).

Notes: Errors are shown for forecasts of the average annual growth rate of the consumer price index (CPI) or the personal 

consumption expenditures (PCE) price index over two-year periods. Date labels refer to the initial year of the two-year 

period.

Before 2008, the CPI was forecast. For most years, the CPI-U (CPI for all urban consumers) was forecast. However, the 

CPI-W (CPI for urban wage earners and clerical workers) was forecast by CBO from 1976 through 1978 and from 1986 

through 1989. From 2008 onward, the PCE price index was forecast. Errors are based on the most recent data reported by 

BEA.

From 1986 onward, growth rates were measured on a fourth-quarter-to-fourth-quarter basis.

All forecasts were issued in the first half of the initial year of the period or in December of the preceding year.

a. Before 2008, forecasts were prepared by the staff of the Board of Governors of the Federal Reserve System. Between 2008 

and 2010, the shaded band encompasses the central tendency of Federal Reserve forecasts. The central tendency reflects the 

forecasts of the members of the Board of Governors and the presidents of the Federal Reserve Banks without the three highest 

and three lowest projections.

CBO and the Federal Reserve largely have had similar 

forecasts of the growth of real output over two-year 

periods (see the figure on the preceding page). Notable divergences occurred during the early 1980s and 

in 2010. Before the 1980 recession, CBO produced a 

relatively accurate forecast of real output growth, 

while the Federal Reserve overestimated the depth of 

the coming recession. However, in early 1981 and 

1982, CBO did not anticipate the advent or depth of 

the 1981–1982 recession, while the Federal Reserve 

accurately forecast the downturn and subsequent 

recovery. In 2010, CBO’s forecast correctly anticipated a continued slow economic recovery following 

the 2007–2009 recession; however, that forecast 

assumed additional fiscal restraint from expiring tax 

provisions that were subsequently extended.1

 In contrast, the central tendency of the Federal Reserve’s 

forecasts proved too optimistic. 

In general, CBO and the Federal Reserve also had 

similar forecasts of inflation (see the figure above). 

However, forecasts conducted between 2001 and 

2005 represent an exception. In early 2001, CBO’s 

forecast overpredicted growth in consumer prices, 

largely because of the unexpected 2001 recession, 

while the Federal Reserve’s expectations showed little 

error. Between 2003 and 2005, both forecasters 

underpredicted inflation rates, but the errors by the 

Federal Reserve were somewhat larger.

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

CBO

Federal Reservea

-5

-4

-3

-2

-1

0

1

2

3

1. In early 2010, current law included the scheduled expiration 

of several tax provisions at the end of December 2010. Most 

of those provisions were originally enacted in the Economic 

Growth and Tax Relief Reconciliation Act of 2001 and the 

Jobs and Growth Tax Relief Reconciliation Act of 2003.
16 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE JANUARY 2013

CBO

Figure 5.

Growth in Real Output: Two-Year Forecasts

Sources: Congressional Budget Office; Office of Management and Budget; Aspen Publishers, Blue Chip Economic Indicators; Department of 

Commerce, Bureau of Economic Analysis (BEA).

Notes: Actual and forecast data show the average annual growth rate of real (inflation-adjusted) output over two-year periods. Date labels 

refer to the initial year of the two-year period.

Real output is either real gross domestic product (GDP) or real gross national product (GNP). Real GNP differs from real GDP primarily 

by including the capital income that residents earn from investments abroad and excluding the capital income that nonresidents earn 

from domestic investment. Real GNP was forecast before 1992; real GDP was forecast from 1992 onward. Actual values show the most 

recent data reported by BEA. 

All forecasts were issued in the first half of the initial year of the period or in December of the preceding year.

-2

0

2

4

6

8

Comparison of CBO Forecast and Actual Growth

Forecast Minus Actual (Percentage points)

(Average annual percentage change)

CBO

Actual

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

-4

-2

0

2

4

6

CBO

Administration

Underestimate

Overestimate

Consensus

Blue Chip
JANUARY 2013 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE 17

CBO

The unexpected 1990–1991 recession resulted in overpredictions of real output growth in 1990. Even so, the 

errors by CBO and the Blue Chip consensus that year 

were actually smaller than the root mean square error for 

the overall 1982–2010 period. In contrast, the Administration overpredicted growth by 2 percentage points in its 

1990 forecast.

In every year between 1992 and 1999, all of the forecasts 

underpredicted two-year growth in real output, with 

very large errors made between 1996 and 1999. About 

one-fourth of the extent of those errors resulted from subsequent revisions that BEA made to the national income 

and product accounts (NIPAs), which included important definitional changes. Those data revisions aside, the 

significant underpredictions made between 1996 and 

1999 reflect several important economic developments 

that analysts did not anticipate—in particular, the investment boom of the late 1990s, which increased the capital 

stock and thereby boosted labor productivity and real 

output more than many forecasters had expected.

Forecasts conducted in 2001 did not anticipate the relatively mild recession in that year. As a result, CBO and 

the Blue Chip consensus overpredicted real output growth 

by about 11⁄2 percentage points, and the Administration 

overpredicted growth by about 13⁄4 percentage points.

Following the recession, economic activity underwent an 

unusually slow recovery and weak expansion. During that 

time, productivity continued to grow at the strong post1995 rate while labor hours grew very little. In forecasts 

conducted between 2004 and 2006, expectations for real 

output growth proved too optimistic; however, errors by 

the Administration and the Blue Chip consensus were 

slightly smaller than those by CBO. Perhaps contributing 

to the overpredictions, rising energy prices (unanticipated 

by many forecasters) dampened growth in real GDP by 

roughly a quarter of a percentage point in 2004, less than 

half of a percentage point in 2005, and about a quarter of 

a percentage point during the first half of 2006.18

Forecasts conducted in 2007 and 2008 failed to anticipate the growing imbalances in the housing and financial 

markets. During the early 2000s, real output growth was 

partly supported by a boom in residential construction, 

which was fueled by a growing bubble in house prices. By 

2007, a downturn in the housing market was apparent, 

and tensions in financial markets began to emerge. 

Despite those tensions, forecasts conducted in early 2008 

assumed that a recession would be avoided. For example, 

in January 2008, CBO reported, “If a severe credit 

crunch did occur, it would drive the economy into 

recession by significantly curbing financial activity and 

consumer spending. However, CBO assumes in its forecast that the Federal Reserve will implement policies to 

prevent such a crunch and that the financial sector is 

capable of absorbing most of the losses it faces.”19 Those 

assumptions did not hold true: In 2008, forecasts by 

CBO, the Administration, and the Blue Chip consensus 

overpredicted real output growth by at least 4 percentage 

points.

In 2009 and 2010, CBO produced relatively accurate 

forecasts of the economic recovery. Relative to CBO, the 

Administration and the Blue Chip consensus expected a 

faster economic recovery and overpredicted real output 

growth in their 2009 and 2010 forecasts. During those 

years, differences in fiscal policy assumptions caused 

CBO’s forecast to diverge from outside forecasts. In early 

2009, participants in the Blue Chip consensus reported 

that they expected additional fiscal stimulus, which 

implied stronger output growth than under then-current 

law.20 In early 2010, CBO’s forecast assumed additional 

fiscal restraint from expiring tax provisions that were 

subsequently extended.21

Growth in Nominal Output. Differences in forecasting 

errors between real and nominal output growth indicate 

inaccuracies in projections of inflation in the GDP price 

index.22 (For information about the difference between 

the GDP price index and the consumer price index 

(CPI), see the “Inflation” section below.) During the 

1980s and 1990s, CBO, the Administration, and the 

Blue Chip consensus tended to overpredict inflation, 

18. See Congressional Budget Office, The Economic Effects of Recent 

Increases in Energy Prices (July 2006), p. 6.

19. See Congressional Budget Office, The Budget and Economic 

Outlook: Fiscal Years 2008 to 2018 (January 2008), p. 23.

20. See Congressional Budget Office, The Budget and Economic 

Outlook: Fiscal Years 2009 to 2019 (January 2009), pp. 10–11.

21. In early 2010, current law included the scheduled expiration of 

several tax provisions at the end of December 2010. Most of those 

provisions were originally enacted in the Economic Growth and 

Tax Relief Reconciliation Act of 2001 and the Jobs and Growth 

Tax Relief Reconciliation Act of 2003.

22. Gross national product and its price index were forecast by CBO, 

the Administration, and the Blue Chip consensus before 1992; 

GDP and its price index were forecast from 1992 onward.
18 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE JANUARY 2013

CBO

which partially offset underpredictions of real output 

growth. Consequently, forecasts of nominal output 

growth appear to have less bias over that period than do 

forecasts of real output growth. 

During much of the 2000s, CBO, the Administration, 

and the Blue Chip consensus tended to underpredict 

inflation rates, which generally offset overpredictions of 

real output growth. However, forecasts conducted in 

2008 provided a notable exception. Early that year, all 

three sets of forecasts assumed that the economy would 

avoid a recession and therefore overpredicted both inflation and real output growth. As a result, forecasts conducted in that year overpredicted nominal output growth 

by 4 to 5 percentage points (see Figure 6).

Inflation

The errors in inflation forecasts generally have reflected 

turbulence in crude oil prices and variation in the state 

of the economy. For example, rapidly rising oil prices 

contributed to forecasters’ sizable underpredictions of 

inflation during the late 1970s and mid-2000s. During 

the early 1980s, the deep recession dramatically and 

unexpectedly reduced the rate of inflation, but forecasters 

only gradually recognized the extent of that reduction 

and consequently made large overpredictions of price 

growth during much of the decade.

The evaluation focuses on two measures of inflation that 

are important for projecting federal outlays and revenues. 

One is the consumer price index, which measures inflation in the prices of a fixed basket of consumer goods 

and services.23 Forecasts of federal outlays depend on 

expected inflation in that index. For example, the CPI is 

used to annually adjust payments to Social Security beneficiaries. Federal revenues also depend on inflation in 

consumer prices, because elements of the individual 

income tax, such as tax brackets, have been indexed to the 

CPI since the mid-1980s. All else being equal, higher 

inflation in the CPI implies faster growth in outlays and 

slower growth in revenues.

The second measure is the difference between the rate of 

inflation in the CPI and the rate of inflation in the price 

index for GDP. The GDP price index is a summary measure of the prices of all goods and services that make up 

gross domestic product. Its growth is a critical determinant in forecasting the growth of nominal GDP and, 

therefore, the growth of income subject to federal taxes. 

All else being equal, higher inflation in the GDP price 

index implies faster growth in revenues. Consequently, 

if the GDP price index was forecast to grow more slowly 

than the CPI, the projected deficit would be larger than if 

the reverse was forecast.

Inflation in the CPI. During the late 1970s, CBO and the 

Administration made similarly large errors in forecasts 

of CPI inflation (see Figure 7 on page 20). Primarily 

because of the spike in crude oil prices in 1979 and 1980, 

forecasts conducted in 1978 and 1979 underpredicted 

inflation by about 4 percentage points, on average.

In forecasts conducted between 1982 and 1986, CBO, 

the Administration, and the Blue Chip consensus overpredicted inflation in the CPI by about 11⁄2 percentage 

points, on average. That tendency largely stemmed from 

the fact that the 1981–1982 recession led to an unanticipated sharp and lasting reduction in the rate of inflation. 

As well, the forecasters did not expect the drop in crude 

oil prices that occurred in early 1986. 

Between 1987 and 2003, CBO, the Administration, and 

the Blue Chip consensus made relatively small errors in 

forecasts of inflation in the CPI, with a root mean square 

error of roughly one-half of a percentage point. Inflation 

forecasts probably benefited from the relatively benign 

economic environment during most of that period, in 

contrast to the turbulence of the late 1970s and early 

1980s. Growth in the CPI remained within a narrow 

range, particularly after 1990.

Between 2004 and 2007, the forecasts were persistently 

optimistic about inflation in the CPI largely because of 

the unexpected rise in crude oil prices, underpredicting 

two-year inflation rates by about 1 percentage point, on 

average. 

In 2008, CBO, the Administration, and the Blue Chip

consensus did not anticipate the 2007–2009 recession 

23. In most years, the inflation forecasts are for the CPI-U, which 

measures inflation in the prices paid by all urban consumers. In 

the period from 1976 to 1978 and from 1986 to 1989, CBO forecast the CPI-W, which measures inflation in the prices paid by 

urban wage earners and clerical workers, while the Administration 

forecast the CPI-W through 1991. For evaluation purposes, the 

distinction between the two measures was consequential mainly in 

1984, when inflation in the CPI-U and CPI-W diverged by 

0.9 percentage points.
JANUARY 2013 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE 19

CBO

Figure 6.

Growth in Nominal Output: Two-Year Forecasts

Sources: Congressional Budget Office; Office of Management and Budget; Aspen Publishers, Blue Chip Economic Indicators; Department of 

Commerce, Bureau of Economic Analysis (BEA).

Notes: Actual and forecast data show the average annual growth rate of nominal output over two-year periods. Date labels refer to the initial 

year of the two-year period.

Nominal output is either gross domestic product (GDP) or gross national product (GNP). GNP differs from GDP primarily by including 

the capital income that residents earn from investments abroad and excluding the capital income that nonresidents earn from 

domestic investment. GNP was forecast before 1992; GDP was forecast from 1992 onward. Actual values show the most recent data 

reported by BEA.

All forecasts were issued in the first half of the initial year of the period or in December of the preceding year.

-2

0

2

4

6

8

10

12

14

Comparison of CBO Forecast and Actual Growth

Forecast Minus Actual (Percentage points)

(Average annual percentage change)

CBO

Actual

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

-4

-2

0

2

4

6

CBO

Administration

Underestimate

Overestimate

Consensus

Blue Chip
20 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE JANUARY 2013

CBO

Figure 7.

Inflation in the Consumer Price Index: Two-Year Forecasts

Sources: Congressional Budget Office; Office of Management and Budget; Aspen Publishers, Blue Chip Economic Indicators; Department of 

Labor, Bureau of Labor Statistics (BLS).

Notes: Actual and forecast data show the average annual growth rate of the consumer price index over two-year periods. Date labels refer to 

the initial year of the two-year period.

Before 1978, BLS published only one consumer price index series, now known as the CPI-W. In January 1978, the bureau began 

publishing the CPI-U. For most years since 1979, the CPI-U was forecast. However, the CPI-W was forecast by CBO from 1986 through 

1989 and by the Administration through 1991. 

All forecasts were issued in the first half of the initial year of the period or in December of the preceding year.

CPI-U = consumer price index for all urban consumers; CPI-W = consumer price index for urban wage earners and clerical workers.

-6

-4

-2

0

2

4

Comparison of CBO Forecast and Actual Inflation

Forecast Minus Actual (Percentage points)

(Average annual rate of inflation)

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

CBO

Administration

Underestimate

Overestimate

0

2

4

6

8

10

12

14

CBO

Actual

Consensus

Blue Chip
JANUARY 2013 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE 21

CBO

and the downward pressure that the recession would 

place on consumer price growth. As a result, CBO and 

the Administration overpredicted inflation slightly, as 

did the Blue Chip consensus to a greater extent. Forecasts 

conducted in 2009 proved relatively accurate, and forecasts in 2010 slightly underpredicted inflation.

Difference Between Inflation Measures. For forecasts 

conducted between 1978 and 1980, CBO and the 

Administration underpredicted the difference in inflation 

measures by more than 2 percentage points, on average. 

In 1979 and 1980, the difference between inflation in the 

CPI and the gross national product (GNP) price index 

spiked to levels unprecedented during the postwar period 

(see Figure 8). A significant part of the divergence can be 

explained by the oil price shock; a surge in oil prices has a 

larger effect on the CPI than on the GNP price index 

because petroleum products represent a much larger share 

of the goods and services consumed in this country than 

of the goods and services produced. Even so, the gap 

between the two inflation measures was unusually wide 

with the effect of energy prices removed. 

In forecasts conducted through early 1999, the tendency 

to underpredict the difference between the inflation measures largely reflected the methodological change to the 

national income and product accounts that year, when 

BEA added business and government purchases of software to investment and, therefore, to GDP. Because the 

price index for software purchases grew much less rapidly 

than other prices, on average, the change in the classification of software spending caused a downward revision of 

the historical data for the growth of the GDP price index. 

Hence, the forecasts made before 2000 were based on a 

pattern of historical growth in the GDP price index that 

was higher than is currently reported. That difference 

probably accounted for about 0.2 percentage points—or 

two-thirds—of the apparent bias in forecasts for that 

period.

Between 2002 and 2007, the difference between the 

inflation measures narrowed, with the CPI growing at 

roughly the same rate as the GDP price index. That 

change in relationship reflects an increase in inflation for 

goods and services measured by the GDP price index 

but not by the CPI, including some investment goods 

(particularly those involved in business, residential, and 

government structures) and military compensation. 

Those developments were not generally anticipated, so 

forecasts conducted between 2001 and 2006 overestimated the difference between inflation measures.

Interest Rates

On average, between 1982 and 2010, CBO, the 

Administration, and the Blue Chip consensus tended to 

overpredict interest rates. Forecasts by the Administration 

appear less biased over the period because large negative 

forecasting errors in the late 1980s offset positive errors 

during other periods (particularly the 2000s). Notably, 

forecasts made after the 1990–1991, 2001, and 2007–

2009 recessions underestimated the duration of the easing of monetary policy, which largely accounts for the 

tendency to overpredict interest rates.

CBO forecasts interest rates on Treasury securities to 

project payments on the federal debt and other components of the budget. Those forecasts focus on two key 

rates—the rate on 3-month Treasury bills and that on 

10-year Treasury notes. All else being equal, higher interest rates result in larger interest payments and faster 

growth in federal debt held by the public. Forecasts of 

interest rates depend on a variety of factors, including 

these:

 Monetary policy. During periods of low inflation and 

high unemployment, for example, the Federal Reserve 

attempts to stimulate demand by lowering short-term 

interest rates, which in turn can lower the cost of 

borrowing over longer periods of time. 

 Inflation. Expectations of inflation are embedded in 

interest rates. Interest rates generally rise, for example, 

when participants in financial markets expect a higher 

rate of inflation in the future. Moreover, the Federal 

Reserve has responded to increasing inflationary 

pressures by taking actions to raise interest rates. 

 The issuance of debt securities. The federal government 

issues Treasury securities to finance budget deficits. All 

else being equal, an increase in the supply of those 

securities would tend to increase interest rates.

 Turmoil in the financial system. In periods when investors have been increasingly concerned about the safety 

of their investments, they have sought to hold more 

U.S. Treasury securities. Such an increase in demand 

lowers interest rates on those securities.
22 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE JANUARY 2013

CBO

Figure 8.

Difference Between Inflation in the CPI and the GDP Price Index: 

Two-Year Forecasts

Sources: Congressional Budget Office; Office of Management and Budget; Aspen Publishers, Blue Chip Economic Indicators; Department of 

Labor, Bureau of Labor Statistics (BLS); Department of Commerce, Bureau of Economic Analysis (BEA).

Notes: Actual and forecast data show the difference between average annual inflation measures (the CPI minus the GDP price index) over 

two-year periods. Date labels refer to the initial year of the two-year period.

The gross national product price index was forecast before 1992; the GDP price index was forecast from 1992 onward. Actual values 

show the most recent data reported by BEA.

Before 1978, BLS published only one CPI series, now known as the CPI-W. In January 1978, the bureau began 

publishing the CPI-U. For most years since 1979, the CPI-U was forecast. However, the CPI-W was forecast by CBO from 1986 through 

1989 and by the Administration through 1991. 

All forecasts were issued in the first half of the initial year of the period or in December of the preceding year.

CPI = consumer price index; GDP = gross domestic product; CPI-U = consumer price index for all urban consumers; 

CPI-W = consumer price index for urban wage earners and clerical workers.

-1

0

1

2

3

4

Comparison of CBO Forecast and Actual Difference

Forecast Minus Actual (Percentage points)

(Percentage points)

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Underestimate

Overestimate

Actual

-4

-3

-2

-1

0

1

CBO

Administration

Consensus

Blue Chip

CBO
JANUARY 2013 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE 23

CBO

CBO has evaluated forecasts of the interest rate on threemonth Treasury bills in both nominal and real terms. The 

nominal rate of interest is the rate quoted in the secondary market.24 The real interest rate used here equals the 

nominal rate minus predicted inflation.

Interest Rate on Three-Month Treasury Bills. In 1978 

and 1979, both CBO and the Administration underpredicted the two-year average nominal interest rate on 

three-month Treasury bills by about 21⁄2 percentage 

points, on average (see Figure 9). That tendency 

stemmed from underpredicting inflation rates during 

that period. In fact, CBO and the Administration overpredicted real interest rates by more than 11⁄4 percentage 

points, on average, in those years (see Figure 10). Those 

overpredictions may have stemmed from the agencies’ 

overly optimistic forecasts of real output growth during 

the period.

During the early 1980s, actions by the Federal Reserve 

raised interest rates, which contributed to two consecutive recessions and ultimately a sharp and lasting cut in 

the rate of inflation. In 1980 and 1981, many forecasters 

did not fully anticipate that prolonged period of restraint 

in monetary policy or its impact on price growth. In 

1980, CBO and the Administration underpredicted both 

nominal and real interest rates, suggesting that monetary 

policy proved tighter than expected over the following 

two years. In 1981, CBO’s forecast overpredicted nominal interest rates but underpredicted real interest rates, 

reflecting an overprediction of inflation; the Administration’s forecast underpredicted both nominal and real 

interest rates.

Between 1982 and 2010, forecasts of nominal interest 

rates on three-month Treasury bills displayed notable 

upward bias. On average, forecasts by CBO and the Blue 

Chip consensus overpredicted nominal interest rates by 

0.6 percentage points; the Administration overpredicted 

nominal interest rates by 0.3 percentage points. In part, 

that bias stemmed from forecasters’ tendency to overpredict inflation rates between 1982 and 1998. Forecasters’ 

difficulty in anticipating business cycle turning points 

also accounts for overpredictions around the 1990–1991, 

2001, and 2007–2009 recessions.

Since 1990, forecasts made after recessions have tended to 

underestimate the duration of the easing of monetary 

policy. For example, forecasts conducted in early 1991 

and 1992 expected interest rates to begin rising as the 

economy recovered from the 1990–1991 recession. The 

recovery, however, was unexpectedly weak, and inflation 

remained low, so the Federal Reserve continued to ease 

monetary policy for several years, pushing down the 

nominal interest rate on three-month Treasury bills from 

7.8 percent in the first half of 1990 to roughly 3 percent 

in 1993.

In forecasts conducted during the 2000–2010 period, 

CBO, the Administration, and the Blue Chip consensus 

overpredicted real interest rates by about 11⁄2 percentage 

points, on average. Much of that bias can be attributed to 

the 2001 and 2007–2009 recessions and to the surprisingly sluggish recovery in economic activity following 

those downturns. Indeed, despite the Federal Reserve’s 

prolonged easing of monetary policy following the 2001 

recession, real output growth during the mid-2000s 

remained weaker than expected. 

Interest Rate on 10-Year Treasury Notes. Between 1984 

and 2010, CBO and the Blue Chip overpredicted the 

nominal interest rate on 10-year Treasury notes by 

0.4 percentage points, on average (see Figure 11 on 

page 26).25 Forecasts by the Administration appear less 

biased (overpredicting the rate by 0.1 percentage point, 

on average), because large negative forecasting errors in 

the late 1980s and early 1990s offset positive errors during other periods (particularly the 2000s). As measured 

by the root mean square error, forecasts by CBO and the 

Blue Chip consensus deviated from actual interest rates by 

about 0.7 percentage points, on average; forecasts by the 

Administration deviated from actual interest rates by 

about 0.9 percentage points, on average.

Between 2000 and 2008, CBO, the Administration, and 

the Blue Chip consensus persistently overpredicted the 

nominal interest rate on 10-year Treasury notes (by 

0.7 percentage points, on average). To some extent, the 

2001 and 2007–2009 recessions explain overpredictions 

24. The rate on newly issued bills was forecast by the Administration 

through 2000 and by the Blue Chip consensus from 1982 to 1985 

and from 1992 to 1997. 

25. For simplicity of exposition, this evaluation refers to 10-year 

Treasury notes. However, forecasts of the Moody’s Aaa corporate 

bond rate were used in years when forecasts of 10-year Treasury 

notes were not made. Those years are 1984 and 1985 for CBO’s 

forecasts and 1984 through 1995 for the Blue Chip consensus 

forecasts.
24 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE JANUARY 2013

CBO

Figure 9.

Interest Rate on Three-Month Treasury Bills: Two-Year Forecasts

Sources: Congressional Budget Office; Office of Management and Budget; Aspen Publishers, Blue Chip Economic Indicators; Federal Reserve; 

Department of the Treasury, Bureau of the Public Debt; Haver Analytics.

Notes: Actual and forecast data show the geometric average of the secondary-market interest rate over two-year periods.

The rate on newly issued bills was forecast by the Administration through 2000 and by the Blue Chip consensus from 1982 to 1985 and 

from 1992 to 1997.

All forecasts were issued in the first half of the initial year of the period or in December of the preceding year.

by forecasts conducted before and during those downturns. To some extent, optimistic forecasts of real output 

growth probably account for overpredictions during the 

expansionary period of the mid-2000s. Given that 

outlook for faster growth in the economy, forecasters 

probably expected the Federal Reserve to try to temper 

that growth and the inflationary pressures that could have 

resulted from it.

By early 2009, forecasters had revised their expectations 

for interest rates downward in the wake of the recession. 

For that reason, forecasts of the rate for 10-year Treasury 

Comparison of CBO Forecast and Actual Interest Rate

Forecast Minus Actual (Percentage points)

(Percent) 

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Underestimate

Overestimate

CBO

Actual

-4

4

CBO

Administration

0

2

4

6

8

10

12

14

-3

-2

-1

0

1

2

3

Consensus

Blue Chip
JANUARY 2013 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE 25

CBO

Figure 10.

Real Interest Rate on Three-Month Treasury Bills: Two-Year Forecasts

Sources: Congressional Budget Office; Office of Management and Budget; Aspen Publishers, Blue Chip Economic Indicators; the Federal 

Reserve; Department of Labor, Bureau of Labor Statistics (BLS); Department of the Treasury, Bureau of the Public Debt; 

Haver Analytics.

Notes: Actual and forecast data show the geometric average of the secondary-market interest rate deflated by growth in the consumer price 

index over two-year periods.

The rate on newly issued bills was forecast by the Administration through 2000 and by the Blue Chip consensus from 1982 to 1985 and 

from 1992 to 1997.

Before 1978, BLS published only one consumer price index series, now known as the CPI-W. In January 1978, the bureau began 

publishing the CPI-U. For most years since 1979, the CPI-U was forecast. However, the CPI-W was forecast by CBO from 1986 through 

1989 and by the Administration through 1991. 

All forecasts were issued in the first half of the initial year of the period or in December of the preceding year.

CPI-U = consumer price index for all urban consumers; CPI-W = consumer price index for urban wage earners and clerical workers.

Comparison of CBO Forecast and Actual Interest Rate

Forecast Minus Actual (Percentage points)

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Underestimate

Overestimate

CBO

Actual

(Percent)

-4

-2

0

2

4

6

-3

-2

-1

0

1

2

3

4

CBO

Administration

-4

Consensus

Blue Chip
26 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE JANUARY 2013

CBO

Figure 11.

Interest Rate on 10-Year Treasury Notes: Two-Year Forecasts

Sources: Congressional Budget Office; Office of Management and Budget; Aspen Publishers, Blue Chip Economic Indicators; and the Federal 

Reserve.

Notes: Actual and forecast data show the geometric average of the interest rate over two-year periods. Date labels refer to the initial year of 

the two-year period.

Forecasts of Moody’s Aaa corporate bond rate were used for the years in which the interest rate on 10-year Treasury notes was not 

forecast: 1984 and 1985 for CBO’s forecasts and 1984 through 1995 for the Blue Chip consensus forecasts.

All forecasts were issued in the first half of the initial year of the period or in December of the preceding year.

Comparison of CBO Forecast and Actual Interest Rate

-2

-1

0

1

2

Forecast Minus Actual (Percentage points)

(Percent)

CBO

Administration

CBO

Actual

0

2

4

6

8

10

12

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Underestimate

Overestimate

Consensus

Blue Chip
JANUARY 2013 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE 27

CBO

notes in 2009 were relatively accurate, deviating 

from actual interest rates by less than one-quarter of a 

percentage point. 

In early 2010, long-term interest rates were expected to 

rise, on average, during the economic recovery; however, 

rates continued to decline over the next two years (particularly in 2011). CBO’s 2010 forecast overpredicted the 

10-year Treasury note rate by 0.7 percentage points; forecasts by the Administration and the Blue Chip consensus 

overpredicted that rate by about 1.2 percentage points.

Wages and Salaries

Particularly since 2001, CBO and the Administration 

have tended to overpredict growth in wages and salaries 

and the change in wages and salaries as a percentage of 

GDP.26 To some extent, the fact that forecasters did not 

anticipate the 2001 and 2007–2009 recessions accounted 

for that tendency. However, both agencies also were surprised by the unusually sluggish recovery in wages and 

salaries relative to output following the two recessions.

Projections of federal revenues importantly depend on 

forecasts of wages and salaries, which are a major component of taxable income.27 Errors in forecasts of wages and 

salaries may result from inaccurate forecasts of various 

items:

 Gross domestic product. Wages and salaries generally 

grow with overall economic activity and inflation. A 

forecast that fails to anticipate a downturn in output 

growth would probably overpredict growth in wages 

and salaries as well.

 The statistical discrepancy between GDP and gross 

domestic income (GDI, the income earned in the production of GDP). In principle, GDP and GDI should 

be equal, but in practice, they differ because BEA uses 

different primary sources to estimate product on the 

one hand and income on the other. To forecast GDI, 

forecasters must also project the statistical discrepancy, 

which is difficult because the discrepancy stems from 

imperfect data collection and estimation processes. 

Unexpected swings in the discrepancy may artificially 

inflate or deflate wages and salaries relative to GDP. 

 Income shares. Income shares refer to the percentage of 

each type of income in GDI.28 Unexpected shifts in 

the composition of income may cause sizable errors in 

forecasts of wages and salaries.

Because the Blue Chip consensus does not report forecasts 

of wages and salaries, the evaluation here discusses only 

forecasts conducted by CBO and the Administration.

Growth in Wages and Salaries. Between 1980 and 2010, 

the projected growth in wages and salaries exceeded 

actual growth by 0.5 percentage points for CBO and by 

0.7 percentage points for the Administration, on average 

(see Figure 12). As measured by the root mean square 

error, forecasts by both agencies deviated from actual 

growth by about 2 percentage points during that period. 

The directions of the errors in forecasting the growth of 

wages and salaries were similar to those for the errors in 

forecasts of nominal output, indicating that the errors 

stemmed in part from errors in predicting the growth of 

both real output and prices.

Change in Wages and Salaries as a Share of Output. 

To isolate the errors that were unique to the forecasts of 

wages and salaries, evaluating those forecasts as a 

share of output is helpful (see Figure 13). Historically, 

two patterns have been notable:

 Wages and salaries as a share of output typically move 

in a cyclical pattern, falling during periods of high 

unemployment and rising when labor markets tighten.

 Since the early 1970s, the share has followed a downward trend. In part, that trend has stemmed from the 

fact that employers and employees have preferred to 

substitute untaxed noncash, or fringe, benefits (such 

as employer-paid health insurance premiums and 

pension contributions) for taxable wages and salaries.29

26. Reported data refer to wage and salary disbursements rather than 

accruals.

27. In past editions of this report, CBO included an analysis of its 

forecast of the sum of wages and salaries and corporate book 

profits. That sum has been dropped from the analysis because 

legislative changes to the tax rules affecting corporations can affect 

book profits and have increasingly done so, which makes it difficult to identify the economic forecasting errors. Wages and salaries 

are less directly affected by legislation.

28. Gross domestic income includes wages and salaries, domestic 

economic profits, employee benefits, proprietors’ income, rental 

income, net interest payments, taxes on production and imports, 

the surplus of government enterprises, business current transfer 

payments, and depreciation—all minus subsidies.

29. Further details about contributions to defined-benefit pension 

plans are outlined in Congressional Budget Office, The Budget 

and Economic Outlook: An Update (August 2005), Box 2-2, 

pp. 32–33.
28 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE JANUARY 2013

CBO

Figure 12.

Growth in Wages and Salaries: Two-Year Forecasts

Sources: Congressional Budget Office; Office of Management and Budget; Department of Commerce, Bureau of Economic Analysis (BEA).

Notes: Actual and forecast data show the average annual growth rate of wage and salary disbursements over two-year periods. Date labels 

refer to the initial year of the two-year period. 

Actual values show the most recent data reported by BEA. The Blue Chip consensus does not include forecasts of wages and salaries.

All forecasts were issued in the first half of the initial year of the period or in December of the preceding year.

Between 1980 and 2010, forecasts of the two-year change 

in the wage and salary share displayed a very slight bias 

on average (overpredictions of less than one-quarter of a 

percentage point).30 As measured by the root mean square 

error, forecasts by both CBO and the Administration 

deviated from the actual change in the share by about 

1 percentage point.

Comparison of CBO Forecast and Actual Growth

Forecast Minus Actual (Percentage points)

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Underestimate

Overestimate

CBO

(Average annual percentage change)

CBO

Administration

-2

0

2

4

6

8

10

12

-4

-2

0

2

4

6

8

Actual

30. For forecasts conducted before 1992, wages and salaries were 

computed as a percentage of GNP; from 1992 onward, they were 

computed as a percentage of GDP.
JANUARY 2013 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE 29

CBO

Figure 13.

Change in Wages and Salaries as a Share of Output: Two-Year Forecasts

Sources: Congressional Budget Office; Office of Management and Budget; Department of Commerce, Bureau of Economic Analysis (BEA).

Notes: Actual and forecast data show the change in wage and salary disbursements as a percentage of output over two-year periods. Date 

labels refer to the initial year of the two-year period.

Output is either gross domestic product (GDP) or gross national product (GNP). GNP differs from GDP primarily by including the 

capital income that residents earn from investments abroad and excluding the capital income that nonresidents earn from domestic 

investment. GNP was forecast before 1992; GDP was forecast from 1992 onward. 

Actual values show the most recent data reported by BEA. The Blue Chip consensus does not include forecasts of wages and salaries.

All forecasts were issued in the first half of the initial year of the period or in December of the preceding year.

Comparison of CBO Forecast and Actual Change

Forecast Minus Actual (Percentage points)

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

CBO

(Percentage points)

Actual

-3

-2

-1

0

1

2

Underestimate

Overestimate

-2

-1

0

1

2

3

CBO

Administration
30 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE JANUARY 2013

CBO

During the first half of the 1980s, wages and salaries fell 

markedly as a percentage of GNP. In large part, that 

decline can be attributed to the 1980 and 1981–1982 

recessions. CBO and the Administration correctly anticipated a decline in the wage and salary share but actually 

overpredicted the decline in most years.

Following a slight rebound in the wage and salary share 

during the mid-1980s, it generally declined through the 

first half of the 1990s. To a large extent, that decline 

derived from a large and unexpected increase in the statistical discrepancy, indicating that the measure of total 

output grew faster than the measure of total income. 

That shift in the discrepancy probably explains overpredictions made by both agencies during the period. 

In the late 1990s, wages and salaries grew rapidly as a percentage of GDP, and CBO and the Administration made 

large underpredictions of the change in the share. Three 

factors probably contributed to the rise in the wage and 

salary share: 

 The statistical discrepancy generally declined during 

that period, indicating that GDP grew more slowly 

than GDI.

 Although labor compensation has increasingly been 

paid in the form of nontaxable benefits throughout 

most of the post-World War II period, that trend 

reversed temporarily as employers’ contributions to 

pension funds and health insurance premiums fell as a 

share of compensation.31

 Employee stock options became more prevalent during the 1990s, and gains from exercising stock options 

count as wage and salary income in the NIPAs. Movements in the wage and salary share of GDP corresponded to movements in the stock market in those 

years.32

During the first half of the 2000s, the wage and salary 

share fell sharply, whereas forecasters expected it to either 

rise or remain roughly unchanged. In part, the decline 

resulted from the shift in labor compensation toward 

nontaxable benefits. The 2001 recession and sluggish 

recovery in the labor market also contributed to the 

decline. However, the recession had only modest effects 

on output growth and the rate of unemployment, so the 

decline in the wage and salary share appeared unusually 

large relative to the severity of the recession.

In forecasts conducted between 2008 and 2010, CBO 

and the Administration underestimated the effects of 

the severe 2007–2009 recession on the wage and salary 

share. Forecasts conducted in 2008 and 2009 produced 

particularly large errors:

 In early 2008, neither forecaster anticipated the onset 

of the recession, and both expected the wage and 

salary share to remain relatively flat over the following 

two years. 

 In early 2009, both forecasters had significantly 

revised their expectations for real output growth 

downward because of the recession; however, they did 

not anticipate resulting effects on the wage and salary 

share over the following two years. Assuming that fiscal policy would follow current law, CBO actually 

forecast a slight increase in the wage and salary share 

toward the end of 2010 in anticipation of tax policy 

changes scheduled to take effect in 2011.33

CBO’s Five-Year Forecasts

Like the two-year forecasts, the five-year forecasts by 

CBO, the Administration, and the Blue Chip consensus 

have generally moved together, showing similar degrees of 

bias and accuracy (see Table 2). 

31. For information about changes in employers’ contributions to 

health insurance during the late 1990s, see, for example, David 

Cutler, Employee Costs and the Decline in Health Insurance Coverage, NBER Working Paper No. 9036 (Cambridge, Mass.: 

National Bureau of Economic Research, July 2002), 

www.nber.org/papers/w9036.pdf.

32. See, for example, Hamid Mehran and Joseph Tracy, The Impact of 

Employee Stock Options on the Evolution of Compensation in the 

1990s, NBER Working Paper No. 8353 (Cambridge, Mass.: 

National Bureau of Economic Research, July 2001), 

www.nber.org/papers/w8353.pdf; and David Lebow and others, 

Recent Trends in Compensation Practices, FEDS Working Paper 

No. 1999-32 (Washington, DC: Board of Governors of the 

Federal Reserve System, July 1999), www.federalreserve.gov/pubs/

feds/1999/199932/199932pap.pdf.

33. In early 2009, CBO’s fiscal policy assumptions were consistent 

with the scheduled expiration of major provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 and the 

Jobs and Growth Tax Relief Reconciliation Act of 2003. Those 

provisions were subsequently extended. The implications for the 

agency’s baseline forecasts of subsequent legislative changes are 

discussed in Congressional Budget Office, What Is a Current-Law 

Economic Baseline?
JANUARY 2013 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE 31

CBO

Table 2.

Summary Measures of Performance for Five-Year Forecasts

(Percentage points)

Sources: Congressional Budget Office; Office of Management and Budget; and Aspen Publishers, Blue Chip Economic Indicators.

Notes: Errors are forecast values minus actual values; therefore, a positive error is an overestimate.

CPI = consumer price index; GDP = gross domestic product; n.a. = not applicable.

a. The Blue Chip consensus is the average of approximately 50 private-sector forecasts.

b. The gross national product price index was forecast before 1992; the GDP price index was forecast from 1992 onward.

Compared with two-year forecasts, five-year forecasts by 

CBO and other forecasters typically have some different 

characteristics: 

 They rely more heavily on underlying trends in the 

economy. CBO, for example, does not forecast fluctuations in the economy from the business cycle after 

the first few years but simply projects output to transition toward its forecast of potential output and other 

variables to move to their long-run values. Therefore, 

errors in five-year forecasts often reveal inaccurate 

projections of the long-term trajectory of the 

economy.

 They are less likely to produce large errors because of 

relatively brief or small shifts in economic activity. For 

example, because CBO’s forecast conducted in early 

2001 did not anticipate the 2001 recession, CBO 

overpredicted the average two-year growth rate of real 

output by about 11⁄2 percentage points but overpredicted the average five-year growth rate by just over 

one-half of a percentage point.

Mean error 0.1 0.3 0.0

Mean absolute error 0.9 1.0 0.9

Root mean square error 1.2 1.2 1.1

Mean error 0.5 0.6 0.6

Mean absolute error 0.9 1.0 0.9

Root mean square error 1.2 1.3 1.2

Mean error 0.3 0.1 0.4

Mean absolute error 0.5 0.5 0.6

Root mean square error 0.6 0.7 0.8

Mean error -0.1 -0.3 -0.2

Mean absolute error 0.3 0.4 0.4

Root mean square error 0.4 0.5 0.4

Mean error 0.9 1.0 n.a.

Mean absolute error 1.4 1.4 n.a.

Root mean square error 1.8 1.8 n.a.

Mean error 0.5 0.4 n.a.

Mean absolute error 1.5 1.4 n.a.

Root mean square error 1.7 1.7 n.a.

Blue Chip 

Difference Between Inflation in the CPI and the GDP Price Index (1983–2007)b

Growth in Wages and Salaries (1980–2007)

Change in Wages and Salaries as a Share of Output (1980–2007)

CBO Administration Consensusa

Growth in Real Output (1979–2007) 

Growth in Nominal Output (1982–2007) 

Inflation in the Consumer Price Index (1983–2007)
32 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE JANUARY 2013

CBO

 They are more likely to produce errors because of 

changes in fiscal policy. CBO’s baseline projections 

assume that future fiscal policies will be consistent 

with current law; however, changes in law can be 

sizable over a five-year horizon.

Growth in Output

Between 1982 and 2007, forecasts of the five-year average 

growth rate for both real and nominal output have deviated from actual growth by roughly 11⁄4 percentage 

points, as measured by the root mean square error. 

Growth in Real Output. In forecasts conducted between 

1976 and 1979, CBO and the Administration overpredicted the five-year average growth rate of real GNP 

by more than 2 percentage points, on average (see 

Figure 14). In part, those errors reflect the unexpectedly 

slow productivity growth (relative to the preceding trend) 

following the 1973–1975 recession, which led forecasters 

to overestimate the level of potential output during the 

late 1970s (see Figure 2 on page 9). Furthermore, forecasts conducted in early 1978 and 1979 did not anticipate the two recessions that occurred during the early 

1980s, which contributed to errors made in those years. 

Forecasts of the five-year growth of real output by CBO, 

the Administration, and the Blue Chip consensus made 

during the early 1980s were relatively accurate, despite 

the large and unexpected 1981–1982 recession. That 

outcome reflected the fact that growth rebounded very 

strongly after the recession, so cumulative growth during 

the recession and subsequent recovery was close to previous forecasts. As economic conditions stabilized after the 

early 1980s, forecasts remained similarly accurate during 

the rest of the 1980s and the early 1990s. Between 1980 

and 1991, the root mean square errors were 0.3 percentage points for CBO, 0.7 percentage points for the 

Administration, and 0.4 percentage points for the Blue 

Chip consensus.

Forecasts made between 1992 and 1999 of the five-year 

average growth rate of real GDP were too pessimistic. On 

average, actual growth exceeded projected growth by 

1.2 percentage points for CBO and by 1.1 percentage 

points for the Administration and the Blue Chip consensus. Those errors largely resulted from the unexpected 

investment boom of the late 1990s, which increased the 

capital stock and thereby boosted labor productivity and 

potential output. Methodological revisions by BEA in 

1999 also contributed to underpredictions at the end of 

the period.

In forecasts conducted between 2000 and 2003, CBO, 

the Administration, and the Blue Chip consensus made 

relatively small overpredictions of the five-year average 

growth rate of real GDP (of roughly one-half of a percentage point, on average). A portion of the errors 

probably stemmed from overestimates of potential output. For example, in early 2002, CBO projected potential 

output to grow at an average annual rate of 3.0 percent 

over the next five years; however, CBO now estimates 

that potential output grew at an average rate of only 

2.6 percent per year between 2002 and 2006.

Forecasts made between 2004 and 2007 of the five-year 

average growth rate of real GDP were much too optimistic, primarily because of the deep and prolonged effects of 

the 2007–2009 recession (which was unanticipated in 

those forecasts). On average during this period, forecasts 

exceeded actual growth by 2.3 percentage points for 

CBO and by 2.2 percentage points for the Administration and the Blue Chip consensus.

Growth in Nominal Output. Differences in forecasting 

errors between real and nominal output growth indicate 

inaccuracies in forecasts of inflation in the GDP price 

index.34 For the entire 1982–2007 period covered in this 

evaluation, all three sets of forecasts overpredicted the 

five-year growth rate of nominal output by roughly onehalf of a percentage point, on average. Throughout the 

1980s and 1990s, forecasters’ tendency to overestimate 

inflation contributed to overpredictions of nominal output growth during much of that period. In contrast, forecasts conducted between 2000 and 2005 tended to 

underpredict inflation rates and therefore partially offset 

overpredictions of real output growth (see Figure 15).

Inflation

On average between 1983 and 2007, forecasts by CBO, 

the Administration, and the Blue Chip consensus tended 

to overpredict inflation over the following five years, as 

captured by the CPI, and to underpredict the difference 

between inflation in the CPI and the GDP price index. 

As measured by the root mean square error, forecasts of 

the average five-year rate of inflation deviated from actual

34. GNP and its price index were forecast by CBO, the Administration, and the Blue Chip consensus before 1992; GDP and its price 

index were forecast from 1992 onward.
JANUARY 2013 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE 33

CBO

Figure 14.

Growth in Real Output: Five-Year Forecasts

Sources: Congressional Budget Office; Office of Management and Budget; Aspen Publishers, Blue Chip Economic Indicators; and Department 

of Commerce, Bureau of Economic Analysis (BEA).

Notes: Actual and forecast data show the average annual growth rate of real (inflation-adjusted) output over five-year periods. Date labels 

refer to the initial year of the five-year period.

Real output is either real gross domestic product (GDP) or real gross national product (GNP). Real GNP differs from real GDP primarily 

by including the capital income that residents earn from investments abroad and excluding the capital income that nonresidents earn 

from domestic investment. Real GNP was forecast before 1992; real GDP was forecast from 1992 onward. Actual values show the most 

recent data reported by BEA.

All forecasts were issued in the first half of the initial year of the period or in December of the preceding year.

Comparison of CBO Forecast and Actual Growth

Forecast Minus Actual

(Percentage points)

(Average annual percentage change)

CBO

Administration

CBO

Actual

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

0

1

2

3

4

5

6

-3

-2

-1

0

1

2

3

4

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Underestimate

Overestimate

Consensus

Blue Chip
34 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE JANUARY 2013

CBO

Figure 15.

Growth in Nominal Output: Five-Year Forecasts

Sources: Congressional Budget Office; Office of Management and Budget; Aspen Publishers, Blue Chip Economic Indicators; Department of 

Commerce, Bureau of Economic Analysis (BEA).

Notes: Actual and forecast data show the average annual growth rate of nominal output over five-year periods. Date labels refer to the initial 

year of the five-year period.

Nominal output is either gross domestic product (GDP) or gross national product (GNP). GNP differs from GDP primarily by including 

the capital income that residents earn from investments abroad and excluding the capital income that nonresidents earn from 

domestic investment. GNP was forecast before 1992; GDP was forecast from 1992 onward. Actual values show the most recent data 

reported by BEA.

All forecasts were issued in the first half of the initial year of the period or in December of the preceding year.

Comparison of CBO Forecast and Actual Growth

Forecast Minus Actual (Percentage points)

(Average annual percentage change)

CBO

CBO

Actual

0

2

4

6

8

10

12

14

Underestimate

Overestimate

-2

-1

0

1

2

3

4

Administration

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Consensus

Blue Chip
JANUARY 2013 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE 35

CBO

inflation by 0.6 percentage points for CBO, 0.7 percentage points for the Administration, and 0.8 percentage 

points for the Blue Chip consensus. For forecasts of the 

difference between inflation in the CPI and GDP price 

index, the root mean square errors were one-half of a 

percentage point or less for all three sets of forecasts.

Inflation in the CPI. By far, the largest errors in five-year 

forecasts of inflation in the CPI occurred during the late 

1970s and early 1980s (see Figure 16 on page 37). Forecasts by CBO and the Administration between 1976 and 

1979 underpredicted the average inflation rate by over 

3 percentage points, on average. As inflation rates fell 

during and after the 1981–1982 recession, forecasters 

gradually revised their five-year estimates downward. 

Between 1982 and 1984, forecasts by CBO and the 

Administration overpredicted average inflation rates by 

about 11⁄2 percentage points, on average.

As inflation rates moderated after the early 1980s, errors 

in five-year forecasts also diminished. Forecasts conducted by CBO and the Blue Chip consensus between 

1985 and 1999 overpredicted the inflation rate by about 

one-half of a percentage point, on average. The Administration noticeably diverged from other forecasters during 

the late 1980s, slightly underpredicting the five-year 

inflation rate.

For forecasts conducted during the 2000s, errors in fiveyear forecasts of inflation remained generally small; 

however, those forecasts exhibited a slight tendency to 

underpredict the growth in consumer prices. In particular, forecasts produced by CBO and the Administration 

between 2003 and 2005 underpredicted the inflation rate 

by about three-quarters of a percentage point, on average; 

to a slightly less extent, the Blue Chip consensus did the 

same.

Difference Between Inflation Measures. In forecasts 

conducted between 1983 and 1998, CBO, the Administration, and the Blue Chip consensus persistently 

underpredicted the difference between five-year average 

inflation rates measured by the CPI and the GDP price 

index (see Figure 17 on page 38).35 On average, the 

projected difference was below the actual difference 

by 0.4 percentage points for CBO and the Blue Chip

consensus and by 0.5 percentage points for the Administration. About 0.2 percentage points of that bias resulted 

from downward revisions to inflation in the GDP price 

index following the comprehensive revision to the NIPAs 

in 1999. 

In forecasts conducted between 2000 and 2007, CBO, 

the Administration, and the Blue Chip consensus did not 

anticipate that the difference between the two inflation 

measures would narrow relative to historical trends. The 

projected difference exceeded the actual difference by 

0.3 percentage points for CBO and by 0.2 percentage 

points for the Administration and the Blue Chip

consensus, on average.

Wages and Salaries

On average between 1980 and 2007, forecasts by CBO 

and the Administration tended to overpredict growth in 

wages and salaries (by about 1 percentage point per year) 

and the change in wages and salaries as a share of output 

(by about one-half of a percentage point) over five-year 

periods. Forecasting errors varied widely over time, however, with substantial underpredictions between 1994 and 

1998.

Growth in Wages and Salaries. Between 1980 and 2007, 

forecasts of the five-year average growth rate of wages and 

salaries displayed notable upward bias; on average, CBO 

overpredicted growth by 0.9 percentage points, and 

the Administration did so by 1.0 percentage point (see 

Figure 18 on page 39). As measured by the root mean 

square error, projections by both forecasters deviated 

from actual values by 1.8 percentage points over that 

period.

Change in Wages and Salaries as a Share of Output.

Between 1980 and 2007, the projected change in wages 

and salaries as a share of output slightly exceeded the 

actual change, by 0.4 percentage points, on average, for 

both CBO and the Administration (see Figure 19 on 

page 40). As measured by the root mean square error, the 

projected change deviated from the actual change by 

1.7 percentage points for both CBO and the Administration.

Forecasts conducted between 1982 and 1986 produced 

pessimistic projections of the change in the wage and salary share over the upcoming five years. Forecasters possibly overestimated the depth and duration of the cyclical 

decline in labor compensation relative to output following the 1980 and 1981–1982 recessions. They may have 

35. For forecasts conducted before 1992, this evaluation analyzed 

forecasts of the GNP price index.
36 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE JANUARY 2013

CBO

also overestimated the extent to which labor compensation would shift away from wages in favor of nontaxable 

benefits.

In their five-year forecasts conducted between 1987 and 

1993, CBO and the Administration estimated only small 

changes in the wage and salary share; however, the share 

declined significantly over the years covered by those 

forecasts. The 1990 recession probably contributed to 

that unexpected decline.

Forecasts conducted between 1994 and 1997 showed relatively small changes in the wage and salary share over 

each five-year period, but the actual changes exceeded the 

projected changes by about 2 percentage points, on average, for both CBO and the Administration. As with the 

two-year forecasts, three factors probably contributed to 

the increase: 

 Measures of income grew more quickly than GDP; 

 Labor compensation shifted away from nontaxable 

benefits in favor of wages; and

 Employee stock options became more prevalent, and 

the value of the stock market rose. 

In almost every forecast conducted between 1999 and 

2007, CBO and the Administration projected the wage 

and salary share to remain relatively flat or to rise slightly 

over the five-year horizon. However, the share generally 

declined during the 2000s, particularly in the wake of the 

2001 and 2007–2009 recessions. 
JANUARY 2013 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE 37

CBO

Figure 16.

Inflation in the Consumer Price Index: Five-Year Forecasts

Sources: Congressional Budget Office; Office of Management and Budget; Aspen Publishers, Blue Chip Economic Indicators; and Department 

of Labor, Bureau of Labor Statistics.

Notes: Actual and forecast data show the average annual growth rate of the consumer price index over five-year periods. Date labels refer to 

the initial year of the five-year period.

Before 1978, BLS published only one consumer price index series, now known as the CPI-W. In January 1978, the bureau began publishing the CPI-U. For most years since 1979, the CPI-U was forecast. However, the CPI-W was forecast by CBO from 1986 through 

1989 and by the Administration through 1991. 

All forecasts were issued in the first half of the initial year of the period or in December of the preceding year.

CPI-U = consumer price index for all urban consumers; CPI-W = consumer price index for urban wage earners and clerical workers.

Comparison of CBO Forecast and Actual Inflation

Forecast Minus Actual

(Percentage points)

(Average annual rate of inflation) 

CBO

Actual

0

2

4

6

8

10

-6

-4

-2

0

2

4

CBO

Administration

Underestimate

Overestimate

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Consensus

Blue Chip
38 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE JANUARY 2013

CBO

Figure 17.

Difference Between Inflation in the CPI and the GDP Price Index: 

Five-Year Forecasts

Sources: Congressional Budget Office; Office of Management and Budget; Aspen Publishers, Blue Chip Economic Indicators; Department of 

Labor, Bureau of Labor Statistics (BLS); Department of Commerce, Bureau of Economic Analysis (BEA).

Notes: Actual and forecast data show the difference between average annual inflation measures (the CPI minus the GDP price index) over 

five-year periods. Date labels refer to the initial year of the five-year period.

The gross national product price index was forecast before 1992; the GDP price index was forecast from 1992 onward. Actual values 

show the most recent data reported by BEA.

Before 1978, BLS published only one CPI series, now known as the CPI-W. In January 1978, the bureau began publishing the CPI-U.

For most years since 1979, the CPI-U was forecast. However, the CPI-W was forecast by CBO from 1986 through 1989 and by the 

Administration through 1991.

All forecasts were issued in the first half of the initial year of the period or in December of the preceding year.

CPI = consumer price index; GDP = gross domestic product; CPI-U = consumer price index for all urban consumers; 

CPI-W = consumer price index for urban wage earners and clerical workers.

Comparison of CBO Forecast and Actual Difference

Forecast Minus Actual 

(Percentage points)

(Percentage points)

-0.5

0

0.5

 1.0

1.5

2.0

CBO

Actual

Underestimate

Overestimate

-3

-2

-1

0

1

CBO

Consensus Administration Blue Chip

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
JANUARY 2013 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE 39

CBO

Figure 18.

Growth in Wages and Salaries: Five-Year Forecasts

Sources: Congressional Budget Office; Office of Management and Budget; Department of Commerce, Bureau of Economic Analysis (BEA).

Notes: Actual and forecast data show the average annual growth rate of wage and salary disbursements over five-year periods. Date labels 

refer to the initial year in the five-year period.

Actual values show the most recent data reported by BEA. The Blue Chip consensus does not include forecasts of wages and salaries.

All forecasts were issued in the first half of the initial year of the period or in December of the preceding year.

Comparison of CBO Forecast and Actual Growth

Forecast Minus Actual

(Percentage points)

(Average annual percentage change)

0

2

4

6

8

10

12

CBO

Actual

Underestimate

Overestimate

-3

-2

-1

0

1

2

3

4

CBO

Administration

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
40 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE JANUARY 2013

CBO

Figure 19.

Change in Wages and Salaries as a Share of Output: Five-Year Forecasts

Sources: Congressional Budget Office; Office of Management and Budget; Department of Commerce, Bureau of Economic Analysis (BEA).

Notes: Actual and forecast data show the change in wage and salary disbursements as a percentage of output over five-year periods. Date 

labels refer to the initial year of the five-year period.

Output is either gross domestic product (GDP) or gross national product (GNP). GNP differs from GDP primarily by including the 

capital income that residents earn from investments abroad and excluding the capital income that nonresidents earn from domestic 

investment. GNP was forecast before 1992; GDP was forecast from 1992 onward. 

Actual values show the most recent data reported by BEA. The Blue Chip consensus does not include forecasts of wages and salaries.

All forecasts were issued in the first half of the initial year of the period or in December of the preceding year.

Comparison of CBO Forecast and Actual Change

Forecast Minus Actual

(Percentage points)

(Percentage points)

CBO

Actual

CBO

Administration

-4

-3

-2

-1

0

1

2

3

Underestimate

Overestimate

-3

-2

-1

0

1

2

3

4

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
CBO

Appendix: 

Forecast and Historical Data

T his appendix offers an overview of the data that the 

Congressional Budget Office (CBO) used to evaluate its 

forecasting record. The evaluation covers forecasts of 

growth in real (inflation-adjusted) and nominal output, 

inflation in the consumer price index (CPI), interest 

rates, and changes in wages and salaries. The historical 

data for output are the current series available from the 

Bureau of Economic Analysis (BEA). Historical data for 

inflation and interest rates varied because CBO, the 

Administration, and the Blue Chip consensus used 

slightly different measures in some years. 

Forecasts Used for this Evaluation

The forecasts by CBO and the Administration were originally published in the early months of 1976 through 

2010.1

 (Two-year forecasts published in early 2011 could 

not be included because the latest full-year historical data 

do not extend beyond 2011.) The Administration’s forecasts were taken from its annual budget documents in 

all but one case: The forecast made in early 1981 by the 

Reagan Administration, based on revisions of the Carter 

Administration’s last budget, came from a separate 

document.2

The Blue Chip consensus forecasts that CBO used for this 

evaluation were those published as close as possible to the 

publication date of CBO’s forecasts. Because the Blue 

Chip consensus did not begin publishing its two-year 

forecasts until the middle of 1981, the first such forecast 

available for the sake of comparison was released in early 

1982. Although the Blue Chip consensus forecast is published each month, in only two months of the year—

March and October—do the forecasts extend beyond two 

years. All but one of the five-year forecasts from the 

Blue Chip consensus that were used in this evaluation 

were published in March; the 1980–1984 forecasts of real 

output were published in May. The Blue Chip consensus 

forecasts do not include several data series, most notably 

forecasts of wages and salaries, that are vital for budget 

projections. 

Growth in Nominal and Real Output

Historical two-year average growth rates of nominal output are based on calendar year averages of the most recent 

quarterly values of gross national product (GNP) and 

gross domestic product (GDP) published by BEA. In 

1991, BEA changed its featured measure of output from 

GNP to GDP. GNP differs from GDP primarily by 

including the capital income that residents earn from 

investments abroad and excluding the capital income that 

nonresidents earn from domestic investment. 

Similarly, figures for real output are based on calendar 

year averages of the most recent quarterly chain-type 

annual-weighted indexes of real GNP and real GDP 

published by BEA. CBO used those recent values because 

the original real GNP and GDP series were subject to 

periodic benchmark revisions, making them unsuitable 

for historical comparisons. 

1. Because CBO has published forecasts for wages and salaries on a 

regular basis only since 1985, this analysis used some unpublished 

forecasts for wages and salaries that the agency made in earlier 

years.

2. CBO’s corresponding forecast was taken from the agency’s published analysis of President Reagan’s budgetary proposals. That 

forecast by CBO, provided as the agency’s baseline projections, 

did not include the economic effects of the new Administration’s 

fiscal policy proposals, but it did assume the continuation of the 

tax and spending policies of the Second Concurrent Resolution on 

the Budget for Fiscal Year 1981, including accelerated depreciation of investment and a 10 percent cut in personal income taxes. 

Another exceptional case occurred in early 1993, when the 

Clinton Administration adopted CBO’s economic assumptions as 

the basis for its budget. As a result, the errors from the early 1993 

forecast are the same for CBO and the Administration.
42 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE JANUARY 2013

CBO

For example, during the 1976–1985 period, forecasters 

published estimates for a measure of growth in real GNP 

that was based on 1972 prices, which was the measure 

published by BEA at that time. In late 1985, however, 

BEA discontinued the series presented in 1972 dollars 

and began to publish figures for GNP in 1982 dollars. As 

a result, an official series of values for GNP growth in 

1972 dollars is not available for the years after 1984, and 

actual two-year average growth rates are not available to 

compare with the forecasts made in early 1984 and 1985.

Moreover, from 1986 to 1991, forecasters published estimates of growth in real GNP based on 1982 prices. BEA 

again revised the benchmark, in the second half of 1991, 

by publishing estimates of GNP in 1987 dollars. Today, 

the historical annual series for GNP presented in 1982 

dollars is available only through 1990, and actual twoyear average growth rates are not available to compare 

with the forecasts made in early 1990 and 1991. In 1995, 

BEA made another switch, late in the year, to a chainweighted measure of GDP. Therefore, the historical 

annual series for GDP presented in 1987 dollars ends 

with the 1994 annual value, and actual two-year average 

growth rates are not available to compare with the 

forecasts made in early 1994 and 1995.

By periodically updating the series to reflect more recent 

prices, BEA’s benchmark revisions yield a measure of real 

output that is more relevant for analyzing contemporary 

movements in real growth. But that process makes it 

difficult to evaluate forecasts of real growth produced 

over a period of years in series that are later discontinued. 

Consequently, comparisons in this evaluation use BEA’s 

chain-type annual-weighted index of real GNP or GDP 

for all historical values.

CPI Inflation

CBO calculated two-year averages of inflation in the consumer price index from calendar year averages of monthly 

data published by the Bureau of Labor Statistics. Before 

1978, the bureau published only one consumer price 

index series, now known as the CPI-W (the price index 

for urban wage earners and clerical workers). In January 

1978, however, the bureau began to publish a second, 

broader consumer price index series, the CPI-U (the price 

index for all urban consumers), including its history.

Until 1992, the Administration published its forecasts for 

the CPI-W, the measure used to index most of the federal 

government’s spending for entitlement programs. By 

contrast, for all but four of its forecasts since 1979—

specifically, those published from 1986 to 1989—

CBO based its forecast of inflation on the CPI-U, the 

measure of inflation now used to index federal income tax 

brackets. The Blue Chip consensus has always included 

forecasts for the CPI-U. Although annual fluctuations in 

the CPI-U and CPI-W are virtually indistinguishable, the 

indexes differ in some years. For that reason, CBO used 

historical data for both series to evaluate the alternative 

forecasting records.

Interest Rates

CBO used monthly data published by the Board of Governors of the Federal Reserve System and the Department 

of the Treasury to calculate two-year averages of shortand long-term interest rates. 

The comparison of forecasts of short-term interest rates 

relied on historical values for two measures of the interest 

rate on three-month Treasury bills: the new-issue rate and 

the secondary-market rate. Before 2001, the Administration forecast the new-issue rate, which corresponds to the 

price of three-month bills auctioned by the Department 

of the Treasury; it reflects the interest actually paid on 

that debt. Since mid-2001, the Administration has forecast the secondary-market rate, which corresponds to the 

price of three-month bills traded outside of Treasury auctions. Such transactions occur continually in markets that 

involve many more traders than do Treasury auctions. 

Thus, the secondary-market rate provides a better 

measure of conditions in financial markets.

CBO forecasts the secondary-market rate and, unlike 

the Administration, has never forecast the new-issue rate. 

The Blue Chip consensus has alternated between the two 

rates: It published the new-issue rate from 1982 to 1985, 

switched to the secondary-market rate from 1986 to 

1991, and then returned to the new-issue rate from 1992 

to 1997. Since March 1997, the Blue Chip consensus has 

forecast the secondary-market rate. There is no reason to 

expect the rates to differ persistently; indeed, the differences between their calendar year averages are minuscule.

CBO likewise compared the various forecasts of longterm interest rates with historical values for two measures 

of long-term rates: the 10-year Treasury note rate and 

Moody’s Aaa corporate bond rate. A comparison of 

forecasts is not possible before 1984 because not all of 
APPENDIX CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE 43

CBO

the forecasters published forecasts of long-term interest 

rates before then. For forecasts made in early 1984 and 

1985, CBO projected the Aaa corporate bond rate. From 

its early 1986 forecast onward, however, CBO projected 

the 10-year Treasury note rate. The Administration has 

always published forecasts for the 10-year Treasury note 

rate, but the Blue Chip consensus forecast the Aaa corporate bond rate until January 1996, when it switched to 

the 10-year Treasury rate.

CBO calculated separate historical values for real shortterm interest rates using the nominal interest rate and the 

inflation rate appropriate for each forecaster. In each case, 

the two-year average interest rate was deflated by the twoyear average growth rate of the consumer price index. 

The resulting real short-term interest rates were similar 

among forecasts.

Wages and Salaries

The income measure examined here—wage and salary 

disbursements—focuses on the source of income to 

which overall tax receipts are most sensitive. In particular, 

because some other types of income are not taxed (for 

instance, income derived from assets held in nontaxable 

accounts), the effective tax rate on wages and salaries 

exceeds the corresponding rate on other income.

Historical estimates of wages and salaries are subject to 

substantial statistical revisions. However, those revisions 

do not have much implication for projections of revenues 

as long as the revisions are carried forward into the forecast. The result is that the accuracy of forecasts of wages 

and salaries is measured by using the forecast change of 

the wage and salary share of GDP.

45 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE JANUARY 2013

CBO

List of Tables and Figures

Tables

1. Summary Measures of Performance for Two-Year Forecasts 13

2. Summary Measures of Performance for Five-Year Forecasts 31

Figures

S-1. Mean Error for Two-Year Forecasts 2

S-2. Root Mean Square Error for Two-Year Forecasts 3

1. Errors in Forecasting the Two-Year Growth of Real Output Near 

Business Cycle Peaks 8

2. Labor Productivity and Hours 9

3. Petroleum Prices and Consumer Inflation 11

4. Forecasts by CBO and Revisions to Values for Real Gross Domestic Product 12

5. Growth in Real Output: Two-Year Forecasts 16

6. Growth in Nominal Output: Two-Year Forecasts 19

7. Inflation in the Consumer Price Index: Two-Year Forecasts 20

8. Difference Between Inflation in the CPI and the GDP Price Index: 

Two-Year Forecasts 22

9. Interest Rate on Three-Month Treasury Bills: Two-Year Forecasts 24

10. Real Interest Rate on Three-Month Treasury Bills: Two-Year Forecasts 25

11. Interest Rate on 10-Year Treasury Notes: Two-Year Forecasts 26

12. Growth in Wages and Salaries: Two-Year Forecasts 28

13. Change in Wages and Salaries as a Share of Output: Two-Year Forecasts 29

14. Growth in Real Output: Five-Year Forecasts 33

15. Growth in Nominal Output: Five-Year Forecasts 34

16. Inflation in the Consumer Price Index: Five-Year Forecasts 37

17. Difference Between Inflation in the CPI and the GDP Price Index: 

Five-Year Forecasts 38

18. Growth in Wages and Salaries: Five-Year Forecasts 39

19. Change in Wages and Salaries as a Share of Output: Five-Year Forecasts 40
JANUARY 2013 CBO’S ECONOMIC FORECASTING RECORD: 2013 UPDATE 46

CBO

About This Document

The Congressional Budget Office (CBO) regularly evaluates the accuracy of its economic 

forecasts by comparing them with the economy’s actual performance and with others’ forecasts. 

Such evaluations help guide CBO’s efforts to improve the quality of its forecasts and, as background 

information, are also intended to assist Members of Congress in their use of the agency’s estimates. 

In keeping with CBO’s mandate to provide objective, impartial analysis, the report makes no 

recommendations.

Stephanie Burns of CBO’s Macroeconomic Analysis Division wrote the report under the supervision 

of Kim Kowalewski and Wendy Edelberg. Robert Arnold, Mark Lasky, and Frank Russek—all of 

CBO—provided helpful comments. 

Joel Prakken of Macroeconomic Advisers also provided helpful comments. (The assistance of an 

external reviewer implies no responsibility for the final product, which rests solely with CBO.)

Alexander Arnon and Thais Canedo provided research assistance, John Skeen edited the report, and 

Jeanine Rees prepared it for publication. The report, along with earlier ones on the topic, is available 

on CBO’s Web site (www.cbo.gov).

Douglas W. Elmendorf 

Director

January 2013