ANALYTICAL PERSPECTIVES BUDGET OF THE US GOVERNMENT

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Analytical Perspectives

BUDGET OF THE U. S. GOVERNMENT

Fiscal Year 2018

Office of Management and Budget

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Analytical Perspectives

BUDGET OF THE U. S. GOVERNMENT

Fiscal Year 2018

Office of Management and Budget

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U.S. GOVERNMENT PRINTING OFFICE, WASHINGTON 2017 GENERAL NOTES

1. All years referenced for budget data are fiscal years unless otherwise noted. All years referenced for economic data are calendar years unless otherwise noted.

2. At the time of this writing, only one of the annual appropriations bills for 2017 had been enacted (the Military Construction and Veterans Affairs Appropriations Act), as well as the Further Continuing and Security Assistance Appropriations Act, which provided 2017 discretionary funding for certain Department of Defense accounts; therefore, the programs provided for in the remaining 2017 annual appropriations bills were operating under a continuing resolution (Public Law 114-223, division C, as amended). For these programs, references to 2017 spending in the text and tables reflect the levels provided by the continuing resolution.

3. Detail in this document may not add to the totals due to rounding.

Budget of the United States Government, Fiscal Year 2018 contains the Budget Message of the President, information on the President’s priorities, and summary tables.

Analytical Perspectives, Budget of the United States Government, Fiscal Year 2018 contains anal- yses that are designed to highlight specified subject areas or provide other significant presentations of budget data that place the budget in perspective. This volume includes economic and accounting analyses; information on Federal receipts and collections; analyses of Federal spending; information on Federal borrowing and debt;

baseline or current services estimates; and other technical presentations.

The Analytical Perspectives volume also has supple- mental materials that are available on the internet at www.budget.gov/budget/Analytical_Perspectives and on the Budget CD-ROM. These supplemental materials include tables showing the budget by agency and account and by function, subfunction, and program.

Appendix, Budget of the United States Government, Fiscal Year 2018 contains detailed in- formation on the various appropriations and funds that constitute the budget and is designed primarily for the use of the Appropriations Committees. The Appendix contains more detailed financial information on individual programs and appropriation accounts than any of the other budget documents. It includes for each agency: the proposed text of appropriations language; budget schedules for each account; legislative proposals; narrative ex- planations of each budget account; and proposed general provisions applicable to the appropriations of entire agen-

cies or group of agencies. Information is also provided on certain activities whose transactions are not part of the budget totals.

ELECTRONIC SOURCES OF BUDGET INFORMATION

The information contained in these documents is available in electronic format from the following sources:

Internet. All budget documents, including documents that are released at a future date, spreadsheets of many of the budget tables, and a public use budget database are available for downloading in several formats from the internet at www.budget.gov/budget. Links to documents and materials from budgets of prior years are also provided.

Budget CD-ROM. The CD-ROM contains all of the printed budget documents in fully indexed PDF format along with the software required for viewing the documents.

The Internet and CD-ROM also include many of the budget tables in spreadsheet format, and supplemental materials that are part of the Analytical Perspectives volume. It also includes Historical Tables that provide data on budget receipts, outlays, surpluses or deficits, Federal debt, and Federal employment over an extended time period, generally from 1940 or earlier to 2018 or 2022.

For more information on access to electronic versions of the budget documents (except CD-ROMs), call (202) 512-1530 in the D.C. area or toll-free (888) 293-6498. To purchase the Budget CD-ROM or printed documents call (202) 512-1800.

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Page List of Charts and Tables �� iii Introduction

1� Introduction ��3 Economic Assumptions and Interactions with the Budget

2� Economic Assumptions and Interactions with the Budget ��9 3� Long-Term Budget Outlook��19 4� Federal Borrowing and Debt ��27 Performance and Management

5� Social Indicators ��45 6� Building and Using Evidence to Improve Government Effectiveness ��55 7� Strengthening the Federal Workforce ��59 Budget Concepts and Budget Process

8� Budget Concepts ��69 9� Coverage of the Budget ��93 10� Budget Process ��99 Federal Receipts

11� Governmental Receipts ��115 12� Offsetting Collections and Offsetting Receipts ��121 Federal Receipts

13� Tax Expenditures ��127 Special Topics

14� Aid to State and Local Governments ��171 15� Strengthening Federal Statistics ��185 16� Information Technology ��191 17� Federal Investment ��197 18� Research and Development ��203 19� Credit and Insurance��209

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21� Federal Drug Control Funding ��241 Technical Budget Analyses

22� Current Services Estimates ��245 23� Trust Funds and Federal Funds ��257 24� Comparison of Actual to Estimated Totals ��271

*Available on the Internet at http://www.whitehouse.gov/omb/budget/Analytical_Perspectives/ and on the Budget CD-ROM

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LIST OF CHARTS

2–1� Range of Uncertainty for the Budget Defecit ��18 3-1� Comparison of Publicly Held Debt ��19 3-2� Comparison of Annual Surplus/Defecit ��20 3-3� Alternative Productivity and Interest Assumptions ��21 3-4� Alternative Health Care Costs ��22 3-6� Alternative Revenue Assumptions ��23 3-5� Alternative Discretionary Assumptions ��23 3-7� Long Term Uncertainties ��24 7–1� Changes from 1975 to 2016 in Employment/Population by Sector ��60 7–2� Masters Degree or Above by Year for Federal and Private Sector ��62 7–3� High School Graduate or Less by Year for Federal and Private Sectors ��63 7–4� Average Age by Year for Federal and Private Sectors ��63 7–5� Pay Raises for Federal vs� Private Workforce ��64 8–1� Relationship of Budget Authority to Outlays for 2018 ��81 16–1� Trends in Federal IT Spending ��191 16–2� IT Portfolio Summary ��192 16–3� Number of Investments by Percentage of IT Spending, 2018 ��193 16–4� CIO Risk Ratings for Investments ��193 16–5� IT Spending by Category ��194 16–6� Digital Projects in Production to Which Digital Experts have Contributed ��195 19–1� Face Value of Federal Credit Outstanding ��226 Page

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Economic Assumptions and Interactions with the Budget Economic Assumptions and Interactions with the Budget

2–1� Economic Assumptions �� 11 2–2� Comparison of Economic Assumptions in the 2017 and 2018 Budgets �� 12 2–3� Comparison of Economic Assumptions �� 13 2–4� Sensitivity of the Budget to Economic Assumptions �� 16 2–5� Forecast Errors, January 1982-Present �� 17 2–6� Differences Between Estimated and Actual Surpluses or Deficits for

Five-Year Budget Estimates Since 1986 �� 18 Long-Term Budget Outlook

3–1� Debt Projections in 25 Years Under Alternative Budget Scenarios �� 22 3–2� Intermediate Actuarial Projections for OASDI And HI, 2016 Trustees’ Reports �� 24 3–3� Intermediate Actuarial Projections for OASDI And HI �� * Federal Borrowing and Debt

4–1� Trends in Federal Debt Held by the Public and Interest on the

Debt Held by the Public �� 28 4–2� Federal Government Financing and Debt �� 30 4–3� Debt Held by the Public Net of Financial Assets and Liabilities �� 34 4–4� Agency Debt �� 36 4–5� Debt Held by Government Accounts �� 37 4–6� Federal Funds Financing and Change in Debt Subject to Statutory Limit �� 40 4–7� Foreign Holdings of Federal Debt �� 41 Performance and Management

Social Indicators

5–1� Social Indicators �� 47 5–2� Sources for Social Indicators �� 51 Strengthening the Federal Workforce

7–1� Federal Civilian Employment in the Executive Branch �� 61 7–2� Total Federal Employment �� 62 7–3� Personnel Pay and Benefits �� 65 7–4� Occupations of Federal and Private Sector Workforces �� 66 Budget Concepts and Budget Process

Budget Concepts

Budget Calendar �� 71 8–1� Totals for the Budget and the Federal Government �� 76 Coverage of the Budget

9–1� Comparison of Total, On-Budget, and Off-Budget Transactions �� 94 Budget Process

10–1� Program Integrity Discretionary Cap Adjustments, including Mandatory Savings �� 101 10–2� Mandatory and Receipt Savings from Other Program Integrity Initiatives �� 103 Page

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Federal Receipts

Governmental Receipts

11–1� Receipts by Source—Summary �� 116 11–2� Effect of Budget Proposals �� 119 11–3� Receipts by Source �� * Offsetting Collections and Offsetting Receipts

12–1� Offsetting Collections and Offsetting Receipts from the Public �� 122 12–2� Summary of Offsetting Receipts by Type �� 123 12–3� Gross Outlays, User Charges, Other Offsetting Collections and Offsetting

Receipts from the Public, and Net Outlays �� 124 12–4� Offsetting Receipts by Type �� * Federal Receipts

Tax Expenditures

13–1� Estimates of Total Income Tax Expenditures for Fiscal Years 2016-2026 �� 130 13–2A� Estimates of Total Corporate Income Tax Expenditures for

Fiscal Years 2016-2026 �� 135 13–2B� Estimates of Total Individual Income Tax Expenditures for

Fiscal Years 2016–2026 �� 140 13-3� Income Tax Expenditures Ranked by Total Fiscal Year 2017-2026 Projected

Revenue Effect �� 145 13–4� Present Value of Selected Tax Expenditures for Activity in Calendar Year 2016 �� 149 Special Topics

Aid to State and Local Governments

14–1� Trends in Federal Grants to State and Local Governments �� 173 14–2� Federal Grants to State and Local Governments—Budget Authority and Outlays �� 175 14–3� Summary of Programs by Agency, Bureau, and Program �� * 14–4� Summary of Programs by State �� * 14–5�–39� 2016 Budget State-by-State Tables �� * Strengthening Federal Statistics

15–1� 2016-2018 Budget Authority for Principle Statistical Agencies �� 189 Information Technology

16–1� Federal IT Spending �� 191 16–2� FY 2018 IT Spending by Agency �� 192 Federal Investment

17–1� Composition of Federal Investment Outlays �� 198 17–2� Federal Investment Budget Authority and Outlays: Grant and Direct

Federal Programs �� 200 Research and Development

18–1� Total Federal R&D Funding by Agency at the Bureau or Account Level �� 203

*Available on the Internet at http://www.budget.gov/budget/Analytical_Perspectives and on the Budget CD-ROM

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Credit and Insurance

19–1� Estimated Future Cost of Outstanding Direct Loans and Loan Guarantees �� 227 19–2� Direct Loan Subsidy Rates, Budget Authority, and Loan Levels, 2016-2018 �� 228 19–3� Loan Guarantee Subsidy Rates, Budget Authority, and Loan Levels, 2016-2018 �� 229 19–4� Summary of Federal Direct Loans and Loan Guarantees �� 230 19–5� Reestimates of Credit Subsidies on Loans Disbursed Between 1992-2016 �� * 19–6� Face Value of Government-Sponsored Lending �� * 19–7� Lending and Borrowing by Government-Sponsored Enterprises (GSEs) �� * 19–8� Direct Loan Transactions of the Federal Government �� * 19–9� Guaranteed Loan Transactions of the Federal Government �� * Budgetary Effects of the Troubled Asset Relief Program

20–1� Change in Programmatic Costs of Troubled Asset Relief Program �� 231 20–2� Troubled Asset Relief Program Current Value �� 232 20–3� Troubled Asset Relief Program Effects on the Deficit and Debt �� 234 20–4� Troubled Asset Relief Program Effects on the Deficit and Debt Calculated

on a Cash Basis �� 234 20–5� Troubled Asset Relief Program Reestimates �� 235 20–6� Detailed TARP Program Levels and Costs �� 236 20–7� Comparison of CBO and OMB TARP Costs �� 237 Federal Drug Control Funding

21–1� Drug Control Funding FY 2016—FY 2018 �� 241 Technical Budget Analyses

Current Services Estimates

22–1� Category Totals for the Baseline �� 245 22–2� Summary of Economic Assumptions �� 248 22–3� Baseline Beneficiary Projections for Major Benefit Programs �� 249 22–4� Impact of Regulations, Expiring Authorizations, and Other Assumptions in the Baseline * 22–5� Receipts by Source in the Projection of Adjusted Baseline �� 250 22–6� Effect on Receipts of Changes in the Social Security Taxable Earnings Base �� 250 22–7� Change in Outlay Estimates by Category in the Baseline �� 251 22–8� Outlays by Function in the Baseline �� 252 22–9� Outlays by Agency in the Baseline �� 253 22–10� Budget Authority by Function In the Baseline �� 254 22–11� Budget Authority by Agency in the Baseline �� 255 22–12� Current Services Budget Authority and Outlays by Function, Category, and Program �� *

Trust Funds and Federal Funds

23–1� Receipts, Outlays and Surplus or Deficit by Fund Group �� 258 Page

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23–3� Income, Outgo, and Balances of Trust Funds Group �� 262 23–4� Income, Outgo, and Balance of Major Trust Funds �� 263 23–5� Income, Outgo, and Balance of Selected Special Funds �� 269 Comparison of Actual to Estimated Totals

24–1� Comparison of Actual 2016 Receipts with the Initial Current Services Estimates �� 271 24–2� Comparison of Actual 2016 Outlays with the Initial Current Services Estimates �� 272 24–3� Comparison of the Actual 2016 Deficit with the Initial Current Services Estimate �� 273 24–4� Comparison of Actual and Estimated Outlays for Mandatory and Related

Programs Under Current Law �� 274 24–5� Reconciliation of Final Amounts for 2016 �� 275 Detailed Functional Tables

25–1� Budget Authority and Outlays by Function, Category and Program �� * Federal Budget by Agency and Account

26–1� Federal Budget by Agency and Account �� * California Bay-Delta Federal Budget Crosscut Report �� **

**Available on the Internet at http://www.whitehouse.gov/omb/budget/Analytical_Perspectives only

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The Analytical Perspectives volume presents analyses that highlight specific subject areas or provide other significant data that place the President’s 2018 Budget in context and assist the public, policymakers, the media, and researchers in better understanding the budget. This volume complements the main Budget volume, which presents the President’s budget policies and priorities, and the Budget Appendix volume, which provides appropriations language, schedules for budget expenditure accounts, and schedules for selected receipt accounts.

Presidential budgets have included separate analytical presentations of this kind for many years. The 1947 Budget and subsequent budgets included a separate section entitled “Special Analyses and Tables” that covered four, and later more, topics. For the 1952 Budget, the section was expanded to 10 analyses, including many

subjects still covered today, such as receipts, investment, credit programs, and aid to State and local governments.

With the 1967 Budget this material became a separate volume entitled “Special Analyses,” and included 13 chapters. The material has remained a separate volume since then, with the exception of the Budgets for 1991–1994, when all of the budget material was included in one volume. Beginning with the 1995 Budget, the volume has been named Analytical Perspectives.

Several supplemental tables as well as several longer tables that were previously published within the volume are available at http://www.budget.gov/budget/

Analytical_Perspectives and on the Budget CD-ROM.

These tables are shown in the List of Tables in the front of this volume with an asterisk instead of a page number.

OVERVIEW OF THE CHAPTERS Economic and Budget Analyses

Economic Assumptions and Interactions with the Budget. This chapter reviews recent economic develop- ments; presents the Administration’s assessment of the economic situation and outlook; compares the economic assumptions on which the 2018 Budget is based with the assumptions for last year’s Budget and those of other forecasters; provides sensitivity estimates for the effects on the Budget of changes in specified economic assumptions; and reviews past errors in economic projections.

Long-Term Budget Outlook. This chapter assesses the long-term budget outlook under current policies and under the Budget’s proposals. It focuses on 25-year projections of Federal deficits and debt to illustrate the long-term impact of the Administration’s proposed policies, and shows how alternative long-term budget assumptions affect the results. It also discusses the uncertainties of the long-term budget projections and discusses the actuarial status of the Social Security and Medicare programs.

Federal Borrowing and Debt. This chapter analyzes Federal borrowing and debt and explains the budget estimates. It includes sections on special topics such as trends in debt, debt held by the public net of financial assets and liabilities, investment by Government accounts, and the statutory debt limit.

Management

Social Indicators. This chapter presents a selection of statistics that offers a numerical picture of the United States and illustrates how this picture has changed over time. Included are economic, demographic and civic, socioeconomic, health, security and safety, and environ- mental and energy statistics.

Building and Using Evidence to Improve Government Effectiveness. This chapter discusses evidence and its role in improving government programs and policies. It articulates important principles and practices including building and using a portfolio of evidence, developing a learning agenda, building an evidence infrastructure, and making better use of administrative data.

Strengthening the Federal Workforce. This chapter presents summary data on Federal employment and compensation, and discusses the initial approach the Administration is taking with Federal human capital management.

Budget Concepts and Budget Process

Budget Concepts. This chapter includes a basic descrip- tion of the budget process, concepts, laws, and terminology, and includes a glossary of budget terms.

Coverage of the Budget. This chapter describes activi- ties that are included in budget receipts and outlays (and are therefore classified as “budgetary”) as well as those activities that are not included in the Budget (and are therefore classified as “non-budgetary”). The chapter also defines the terms “on-budget” and “off-budget” and includes illustrative examples.

Budget Process. This chapter discusses proposals to improve budgeting and fiscal sustainability within individual programs as well as across Government.

Federal Receipts

Governmental Receipts. This chapter presents infor- mation on estimates of governmental receipts, which consist of taxes and other compulsory collections. It includes descriptions of tax-related legislation enacted in

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the last year and describes proposals affecting receipts in the 2018 Budget.

Offsetting Collections and Offsetting Receipts. This chapter presents information on collections that offset outlays, including collections from transactions with the public and intragovernmental transactions. In addition, this chapter presents information on “user fees,” charges associated with market-oriented activities and regulatory fees. A detailed table, “Table 12–4, Offsetting Receipts by Type” is available at the Internet address cited above and on the Budget CD-ROM.

Tax Expenditures. This chapter describes and pres- ents estimates of tax expenditures, which are defined as revenue losses from special exemptions, credits, or other preferences in the tax code.

Special Topics

Aid to State and Local Governments. This chapter presents crosscutting information on Federal grants to State and local governments. The chapter also includes a table showing historical grant spending, and a table with budget authority and outlays for grants in this Budget.

Tables showing State-by-State spending for major grant programs are available at the Internet address cited above and on the Budget CD-ROM.

Strengthening Federal Statistics. This chapter discuss- es the vital role of the Federal government’s statistical agencies and programs in generating data that citizens, businesses, and governments need to make informed deci- sions. This chapter also provides examples of innovative developments and applications throughout the Federal statistical community and highlights 2018 Budget proposals for the Government’s principal statistical programs.

Information Technology. This chapter addresses Federal information technology (IT), highlighting initiatives to improve IT management through modern solutions to enhance service delivery. The Administration will engage agencies with PortfolioStat reviews of IT investments, advancing modernization and cost reduction through the Data Center Optimization Initiative, use of shared services, migrations to cloud-computing, and leveraging Federal buying power. Digital experts will continue to transform many of the Government’s highest impact programs, while cybersecurity will be strength- ened through the Continuous Diagnostics and Mitigation (CDM) program, and developing new strategies to meet emerging threats.

Federal Investment. This chapter discusses Federally- financed spending that yields long-term benefits. It presents information on annual spending on physical capital, research and development, and education and training.

Research and Development. This chapter presents a crosscutting review of research and development funding in the Budget.

Credit and Insurance. This chapter provides cross- cutting analyses of the roles, risks, and performance of Federal credit and insurance programs and Government- sponsored enterprises (GSEs). The chapter covers the major categories of Federal credit (housing, education,

small business and farming, energy and infrastructure, and international) and insurance programs (deposit insurance, pension guarantees, disaster insurance, and insurance against terrorism-related risks). Five additional tables address transactions including direct loans, guaranteed loans, and Government-sponsored enterprises. These tables are available at the Internet address cited above and on the Budget CD-ROM.

Budgetary Effects of the Troubled Asset Relief Program.

The chapter provides special analyses of the Troubled Asset Relief Program (TARP) as described in Sections 202 and 203 of the Emergency Economic Stabilization Act of 2008, including information on the costs of TARP activity and its effects on the deficit and debt.

Federal Drug Control Funding. This chapter displays enacted and proposed drug control funding for Federal de- partments and agencies.

Note: Previous Analytical Perspectives volumes included a “Homeland Security Funding Analysis” chapter, and provided additional detailed information on the Internet address cited above and on the Budget CD-ROM. P.L.

115–31 eliminated the statutory reporting requirement for this information. Therefore, this information is not included in this year’s Budget and it will not be included in future Budgets.

Technical Budget Analyses

Current Services Estimates. This chapter presents es- timates of what receipts, outlays, and the deficit would be if current policies remained in effect, consistent with the baseline rules in the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA). Two detailed tables addressing factors that affect the baseline and pro- viding details of baseline budget authority and outlays are available at the Internet address cited above and on the Budget CD-ROM.

Trust Funds and Federal Funds. This chapter provides summary information about the two fund groups in the budget—Federal funds and trust funds. In addition, for the major trust funds and certain Federal fund programs, the chapter provides detailed information about income, outgo, and balances.

Comparison of Actual to Estimated Totals. This chap- ter compares the actual receipts, outlays, and deficit for 2016 with the estimates for that year published in the 2016 Budget, published in February 2015.

The following materials are available at the Internet address cited above and on the Budget CD-ROM:

Detailed Functional Table

Detailed Functional Table. Table 25–1, “Budget Authority and Outlays by Function, Category, and Program,” displays budget authority and outlays for major Federal program categories, organized by budget function (such as health care, transportation, or national defense), category, and program.

Federal Budget by Agency and Account

The Federal Budget by Agency and Account. Table 26–1, “Federal Budget by Agency and Account,” displays

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budget authority and outlays for each account, organized by agency, bureau, fund type, and account.

The following report is available at the Internet address cited above:

California Bay-Delta Federal Budget Crosscut California Bay-Delta Federal Budget Crosscut. The California Bay-Delta interagency budget crosscut report

includes an estimate of Federal funding by each of the participating Federal agencies to carry out its responsi- bilities under the California Bay-Delta Program, fulfilling the reporting requirements of section 106 of Public Law 108-361.

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INTERACTIONS WITH THE BUDGET

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This chapter presents the economic assumptions that underlie the Administration’s Fiscal Year 2018 Budget.¹ It describes the recent performance of the U.S. economy, explains the Administration’s projections for key macroeconomic variables, compares them with forecasts prepared by other prominent institutions and discusses the uncertainty inherent in producing an eleven-year forecast.

After contracting by more than 4 percent over 2007 to 2009, the United States economy has experienced stable but only relatively modest growth, especially when compared with past recoveries. From the trough in the second quarter of 2009, it took about two years for the economy to recover its previous output peak, much longer than in the other recoveries since World War II. Over the first three years of recoveries from previous postwar recessions, average output growth was a little over 5 percent annually.

In the first three years following the most recent recession, average annual growth was only about 2.3 percent.

The disappointing recovery is motivating this Administration’s aggressive economic strategy, which entails policies aimed at reforming the tax code and the regulatory framework. In addition, the Administration will introduce policies to encourage domestic energy development and investments in infrastructure, reform the health care system, negotiate more attractive trade agreements, and reduce (and eventually eliminate) Federal budget deficits. Such actions should encourage investment by American firms, stimulate productivity growth, and slow the expected decline in the labor force participation rate, leading to stronger growth in output and putting more Americans to work.

This chapter proceeds as follows:

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The first section reviews the performance of the U.S.

economy since the publication of the 2017 Budget, examining a broad array of economic outcomes.

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The second section provides a detailed exposition of the Administration’s economic forecast for the 2018 Budget, discussing how a number of macroeconomic variables are expected to evolve over the years 2017 to 2027.

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The third section compares the forecast of the Ad- ministration with those prepared by the Congressio- nal Budget Office, the Federal Open Market Com- mittee of the Federal Reserve, and the Blue Chip panel of private sector forecasters.

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The fourth section discusses the sensitivity of the Administration’s projections of Federal receipts and

1 Economic performance is discussed in terms of calendar years. Bud- get figures are discussed in terms of fiscal years.

outlays to fluctuations in the main macroeconomic variables discussed in the forecast.

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The fifth section considers the errors and possible biases² in past Administration forecasts, compar- ing them with the errors in forecasts produced by the Congressional Budget Office and the Blue Chip panel.

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The sixth section combines results on the sensitivity of the budget deficit to economic assumptions with information on past accuracy of Administra- tion forecasts to provide a sense of the uncertainty associated with the Administration’s forecast of the budget balance.

Recent Economic Performance³

The U.S. economy continued to exhibit subdued growth throughout 2016. In the fourth quarter of 2016, real Gross Domestic Product (GDP) was 2.0 percent higher than it had been in the fourth quarter of the preceding year.

This came on the heels of real GDP growing at a 1.9 percent rate over the four quarters of 2015, and an average growth rate of 2.1 percent (fourth quarter-on-fourth quarter) since 2010. Among the demand components of GDP, real consumer spending accounted for most of the growth in 2016, with consumption of nondurables and services contributing 1.5 percentage points and consumption of durable goods contributing a further 0.7 percentage point, on a fourth quarter-over-fourth quarter basis. Gross private domestic investment and government consumption and gross investment made only minor positive contribu- tions to growth, while net exports had a negative impact.

On the supply side, weak productivity growth limited overall growth during 2016, as it has over the past several years. Over the four quarters of 2016, real output per hour in the nonfarm business sector grew by only 1.1 percent, well below the long run average of 2.1 percent during the post-World War II period.

Labor Markets—Labor markets improved in 2016 across a broad array of metrics. The unemployment rate continued to decline, falling from 5.0 percent at the end of 2015 to 4.7 percent at the end of 2016, and further to 4.4 percent in April of 2017, below the long-term average of 5.8 percent. During the first three months of 2017, the labor force participation rate averaged 63.0 percent, up from 62.7 percent in 2015 and and 62.8 percent in 2016.

Although the participation rate has stabilized somewhat

2 As discussed later in this chapter, “bias” here is defined in the statistical sense and refers to whether previous Administrations’ forecasts have tended to make positive or negative forecast errors on average.

3 The statistics in this section are based on information available in early May 2017.

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following a steep decline since 2000, it is expected to fall further as the baby boom generation continues retiring in large numbers. The proportion of the labor force employed part-time for economic reasons has fallen to 3.3 percent in April 2017, well below its peak of over 6.0 percent during the Great Recession. Furthermore, the proportion of the labor force unemployed for longer than 27 weeks has fallen to 1.0 percent from a peak of nearly 4.4 percent.

In spite of these improvements, several metrics suggest that the economy has not regained the ground it had lost.

Compared with the last business cycle peak at the end of 2007, the proportion of the labor force working part-time for economic reasons and the proportion unemployed for more than 27 weeks are still elevated, as are the shares of the working-age population only marginally attached to the labor force or too discouraged to look for work. The labor force participation rate among men aged 20 years old or older has fallen faster than that of the population as a whole, and the same is true of those who have only a high school diploma. Real average hourly wages for production and nonsupervisory workers have grown more slowly than real output since the end of 2007. At the end of 2016, the employment-to-population ratio for Americans aged between 25 and 34 years old was still a full percentage point below where it was at the start of the Great Recession. Even among workers older than 25 with a bachelor’s degree or higher, the unemployment rate has stopped falling and remains above the rates seen before the recession started.

Housing—The housing market continued to bolster the broader economy in 2016. House prices, as measured by the Federal Housing Finance Agency’s (FHFA) purchase-only index, were 6.2 percent higher in December 2016 than in December 2015, while the S&P-Case Shiller price index (another closely watched measure) estimated the appreciation at 5.5 percent. Higher house prices help fortify household balance sheets and support personal consumption expenditures. They also encourage further activity in the housing sector. Residential fixed investment increased 1.1 percent over the four quarters of 2016.

The number of housing starts rose from an annual rate of less than 1.2 million in December 2015 to nearly 1.3 million in December 2016, or a 9.9 percent increase. Building permits increased 2.2 percent over the same period.

Some weakness still remains in the housing market, however. As of February, while the FHFA index was about 8.0 percent higher than its pre-crisis peak, the S&P-Case Shiller index had only barely regained its previous apex.

Homeownership rates have steadily declined since the recession began and were near an all-time low at the end of 2016.

Consumption—Consumer spending was a primary driver of growth in 2016, and at close to 70 percent of the economy, it is essential to overall growth. Consumption growth was spread over a number of different categories, including motor vehicles and parts (8.6 percent over the four quarters of 2016), furnishings and household equipment (6.1 percent), recreational goods and vehicles (11.3 percent), food and beverages (4.9 percent), and medical care (4.7 percent).

Investment—Disappointingly, growth in nonresiden- tial fixed investment was negative in 2016. A 3.8 percent decline in spending on equipment over the four quarters of 2016 offset a modest (1.9 percent) increase in spending on structures and a more robust (4.3 percent) rise in intellectual property products. Growth in overall private investment (residential and nonresidential) has been below its postwar average in each of the last three years.

Such weakness is likely to be problematic for future productivity growth.

Government—Overall demand from the government added modestly to GDP in 2016, with the State and local sector driving growth in this component. Government consumption and gross investment rose by 0.2 percent over the four quarters of 2016, with 0.4 percent growth coming from State and local governments. Federal pur- chases, in contrast, were negative. The Federal deficit edged up to 3.2 percent of GDP in fiscal year 2016, the first increase since the end of the Great Recession. While deficits might be expected to lead to higher interest rates and subsequent crowding out of private investment, the low interest rate environment that has obtained in recent years has mitigated this potentially negative force.

Monetary Policy—After holding nominal interest rates near zero for seven years, the Federal Open Market Committee of the Federal Reserve raised the target range for the federal funds rate by 25 basis points at the end of 2015. After a moderate pause, the Federal Reserve continued normalization of monetary policy, with a 25 basis point increase in December 2016 and another in March 2017. In its March policy statement, the FOMC cited

“solid” job gains and expectations for continued strengthening of labor markets, as well as rates of inflation around the 2.0 percent target, as reasons for tightening policy.

Similarly, the yield on the 10-year Treasury note has also increased recently, from an average of 1.6 percent in the third quarter of 2016 to an average of 2.4 percent during the first quarter of 2017.

Oil and Gas Production—After reaching a post-fi- nancial crisis peak above $100 per barrel, crude oil prices began to tumble in mid-2014. They continued to fall in 2015 and bottomed out around $30 in early 2016. Prices have since rebounded, rising above the $50 mark in late 2016. Higher oil prices act as a kind of tax on consum- ers’ purchasing power, so their net decline from $100 per barrel in early 2014 to just above $50 per barrel recently has effectively raised disposable incomes, which has sup- ported consumer spending. With new technology such as hydraulic fracturing, U.S. oil producers have emerged as important swing producers in global oil markets, helping to lower prices and moderate price fluctuations. Domestic production of crude oil averaged about 8.9 million barrels per day in 2016, up from 7.5 million barrels per day in 2013, although slightly down from 9.4 million barrels per day in 2015. The decline from 2015 reflects the decline in oil prices. Production of natural gas has experienced a qualitatively similar path, with production averaging about 72.3 billion cubic feet per day in 2016, down 2.5 percent from 2015 production levels, but still 9.1 percent higher than in 2013.