The Economy and the Extenders

As is the case every first Friday of the month, BLS released its jobs data, which for December showed another solid month for employment. About 200,000 new jobs were added and the unemployment rate fell to 8.5 percent. The underemployment rate, a broader measure which includes workers who have stopped looking for a job and people who are working part-time for economic reasons, fell from 15.6 percent to 15.2 percent in December; this measure has declined by more than a percentage point over the last three months. 

Of course, the economy is not close to a full or even partial recovery, and even the positive trend has been too short to declare success.  But a more optimistic outlook for the economy would impact the numbers underlying many budgetary issues, even in the short-term. CBO's most recent economic assumptions from August projected that the unemployment rate would average 8.7 percent through 2012 and 2013. If they perceive a consistent downward trend in unemployment that can outpace the economic headwinds coming from Europe, those numbers should go down. 

Beyond affecting the numbers in their January baseline, changing economic assumptions could also impact the upcoming extensions that must be done by the end of February; however, the direction of this effect is unclear. Clearly, a falling unemployment rate would decrease the cost of extended unemployment insurance benefits, but it would also increase the revenue lost from the payroll tax cut (albeit against a baseline of higher payroll tax revenue) because of expanding employment. If the two extensions were considered separately, a more optimistic economic outlook could increase the pressure to not pay for a longer-term payroll tax cut, since coming up with offsets would be more difficult. This effect would be magnified if Congress chose to extend it through 2013. On the flip side, paying for an unemployment insurance extension would become easier to do as the cost declines.

Of course, we'll have to see what happens when the new baseline comes out. CBO may decide that the troubles in Europe are enough to hold back the recovery and that the recent positive trend here in the U.S. will not continue. But if it makes its economic assumptions more optimistic, we may see an impact on upcoming extenders negotiations.