Changes in Projections of Capital Accumulation and Productivity Since Last Year. Several changes in CBO’s projections have led the agency to lower its projection of growth in capital services compared with last year’s projection. First, the agency’s projections of federal deficits are larger this year than they were last year, leading to more federal borrowing and thus more crowding out of private investment. Second, CBO has reduced its projection of labor force growth, reducing the need for investment to provide workers with capital. Third, CBO has revised its analytic methods to better account for the effects of slower population growth and slower formation of new households on private investment in residential housing. The agency now projects that as population growth and household formation continue to slow, housing starts and other forms of private investment will also grow more slowly in the long term, further reducing the projected growth of capital services.

The effects of long-term demographic trends and larger projected deficits on investment, along with the effects of climate change on the growth of nonfarm business TFP, reduce the projected growth of real GDP per hour worked from 2019 to 2049 by nearly 0.2 percentage points, from an annual average of 1.5 percent in last year’s forecast to 1.3 percent this year. Because CBO expects slightly fewer people to hold multiple jobs and the unemployment rate to be slightly higher than the agency projected last year, the growth of potential labor force productivity is revised downward by only about 0.1 percentage point, slightly less than the growth of real GDP per hour worked.

Inflation

CBO projects rates of inflation for two categories: prices of consumer goods and services and prices of final goods and services.16 Those rates influence nominal (current-dollar) levels of interest rates, income, and indexation of income tax brackets, thereby influencing tax revenues, various types of federal expenditures that are indexed for inflation, and interest payments on federal debt.