CBO sees difficult economic times ahead

WASHINGTON (Reuters) - The U.S. economy faces even more difficult times ahead with chronic high unemployment rates and slow manufacturing growth hurting the recovery, Congressional Budget Office Director Douglas Elmendorf said on Thursday.

The U.S. unemployment rate will not fall to around 5.0 percent until 2014, Elmendorf wrote in his blog about CBO's new economic and budget outlook.

Without significant changes in U.S. tax and spending laws, the U.S. government will struggle to dig its way out of a fiscal deficit hole, the CBO said, and this may influence the outcome of the November 2 midterm congressional elections.

Anxiety over the economy could punish President Barack Obama's Democrats at the polls given perceptions of big budget deficits resulting from government spending and high unemployment.

CBO, the non-partisan budget analyst for Congress, forecast the U.S. budget deficit will hit $1.342 trillion this year, down slightly from its March projection of $1.368 trillion.

CBO attributed most of the $27 billion change in its fiscal 2010 deficit projection to an estimated $50 billion reduction in the cost of TARP, the U.S. government's bailout of financial institutions in 2009.

CBO also forecast a $1.066 trillion deficit for fiscal year 2011, which begins on October 1, up slightly from the March estimate of $996 billion.

The CBO's budget and economic outlook is designed to give lawmakers the most up-to-date nonpartisan assessment of U.S. economic health and provide the latest projections on deficits that began in 2002 under former President George W. Bush and then skyrocketed in 2009 during recession and stimulus spending under Obama.

The CBO's deficit numbers are slightly better than recent White House predictions for the fiscal gap, but the two use different measurements.

Members of Congress will rely on the CBO numbers as they decide how to tackle the yawning budget gap.

The U.S. budget deficit last year was a record $1.413 trillion, 9.9 percent of gross domestic product.

In fiscal year 2012, the CBO projected a $665 billion deficit, that would then fall to $525 billion the following year, the source said.

The expiration at the end of this year of tax cuts enacted by Bush is reflected in the CBO's 2011 and 2012 numbers although Obama says he wants to maintain some of the reductions.

In financial markets, U.S. government debt prices have risen and yields have fallen despite the deficits on concern about the weak economic recovery. The benchmark 10-year Treasury note yield fell to a 17-month low of 2.56 percent this week.

However, some warn Treasury yields could rise sharply if investors lose confidence in Washington's ability to rein in the fiscal deficit.

(Additional reporting by David Clarke)