On July 21, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the United States.1 The consultation documents are accompanied by a report analyzing the spillovers from U.S. policies to the rest of the world.
The U.S. economy continues to recover from its worst financial crisis since the Great Depression, aided by supportive macroeconomic policies. Monetary policy remains highly accommodative, with policy rates near zero and a significantly expanded Federal Reserve balance sheet. Fiscal policy provided a sizable stimulus to demand over 2009–2010, but the fiscal impulse for the current fiscal year is likely to be about zero. The financial system continues to strengthen, although lending conditions remain tight for some segments. Household balance-sheet repair has continued amidst still declining house prices and high unemployment rates, weighing on consumption, while construction activity remains depressed. Corporate spending and hiring remain relatively weak, despite record-high profit growth and easy financing conditions for large firms. GDP growth slowed from 2¾ percent (saar) in the second half of 2010 to just under 2 percent (saar) in the first half of 2011, reflecting inter alia the impact of higher oil prices and several transient factors. The U.S. current account deficit has moved broadly sideways as higher oil prices have offset the effects of strong external demand and the dollar’s depreciation. Overall, the slow pace of the recovery is consistent with past international experience in the aftermath of housing and financial crises.
The outlook is for continued albeit modest growth. With sluggish private domestic demand economic slack remains large: in particular, the unemployment rate has declined only modestly from its recent peak. As a result, inflation pressures will likely remain contained, despite the recent firming in core inflation. Risks are elevated and tilted to the downside, especially from the housing market and possible global financial market disruptions from the sovereign crisis in Europe.
On the policy front, the administration and Congressional policymakers have presented medium-term fiscal adjustment proposals, and current negotiations suggest that fiscal policy is set to enter a consolidation phase to address its unsustainable trajectory. The Federal Reserve has indicated that economic conditions are likely to warrant an accommodative monetary policy stance for an extended period and any future policy moves would depend on incoming data, including on inflation expectations.
On the financial sector front, the official financial support deployed during the crisis is being wound down and the legislated reform of financial supervision and regulation is being implemented. In particular, the Financial Stability Oversight Committee (FSOC) has ramped up operations and numerous rules are being promulgated. However, many issues remain to be worked out, notably in areas involving systemically important financial institutions and international coordination.
Executive Board Assessment
Executive Directors observed that the economic recovery continues at a modest pace, though slowing down recently due partly to some transient factors. Directors noted that depressed real estate markets, persistent high unemployment, and weak consumer confidence have held back growth prospects. While macroeconomic policies have remained supportive thus far, fiscal policy faces tighter constraints going forward, given unsustainable public debt dynamics. With a still-wide output gap and downside risks to the outlook, especially potential spillovers from European financial markets, Directors called for a cautious approach to unwinding macroeconomic support.
Directors agreed that placing public debt on a sustainable path is critical to the stability of the U.S. economy, with positive spillovers to other countries. They welcomed the administration’s objective to stabilize the debt ratio by mid-decade and gradually reduce it afterward. Directors highlighted the urgency of raising the federal debt ceiling and agreeing on the specifics of a comprehensive medium-term consolidation plan. With a well-defined, credible multi-year framework in place, the pace of deficit reduction in the short run could be more attuned to cyclical conditions.
Directors generally concurred that fiscal adjustment should start in FY2012 to guard against the risk of a disruptive loss in fiscal credibility. The strategy should include entitlement reforms, including additional savings in health care, as well as revenue increases, including by reducing tax expenditures. Directors welcomed the administration’s proposals for multi-year expenditure caps on non-security discretionary spending and a “failsafe” mechanism that would trigger automatic actions against deficit overruns.
Directors broadly agreed that, given prospects for subdued inflation and significant resource underutilization, an accommodative monetary policy will likely remain appropriate for quite some time. They called for continued vigilance to inflation developments and a decisive policy response as appropriate. When conditions warrant a monetary exit, a gradual reduction of asset holdings, accompanied by clear communication, was viewed as an essential first step.
Directors noted that further efforts are needed to address problems in the housing and labor markets. Measures to mitigate distressed sales and facilitate loan modifications would help stabilize house prices, while the reform of the government-sponsored enterprises should be accelerated. Directors encouraged a re-examination of existing active labor market programs, including job training and education programs.
Directors commended the authorities for the significant progress in repairing and reforming the financial sector, notably the implementation of the FSAP recommendations and the establishment of the Financial Stability Oversight Council. They encouraged the authorities to promptly allocate appropriate resources to fund the improvements in regulation and supervision, and to resist pressures to water down the legislation. Strengthening the crisis prevention framework for financial institutions is a priority, particularly in light of the global role played by the U.S. financial system. Directors emphasized in particular the importance of subjecting systemically important financial institutions to heightened scrutiny and prudential standards, and looked forward to further progress in this area. They commended the United States for its active engagement in fostering international coordination on financial regulatory reforms.
Directors welcomed a multilateral approach to economic policy management in the context of the spillover exercise. They noted that U.S. performance and policies have uniquely large spillovers to the rest of the world mainly through financial linkages, although some Directors noted that spillovers through the trade channel should not be underestimated. Important contributions that the United States can make to global growth and stability include (i) raising domestic savings, particularly through fiscal consolidation, and (ii) strengthening financial sector regulation and supervision. A number of Directors cautioned that the extraordinarily low level of interest rates in the United States may have encouraged excessive risk-taking, affected cross-border capital flows, and added to global inflationary pressures. Some also saw the potential risk of capital flow reversals that could arise from the eventual monetary exit by the United States, underlining the importance of policy communication, although some others were of the view that capital flows are driven increasingly by structural factors. Directors welcomed the authorities’ continued commitment to secure the success of multilateral trade negotiations.
Public Information Notices (PINs) form part of the IMF’s efforts to promote transparency of the IMF’s views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The
|National production and income|
|Net exports 1/||-0.1||0.6||1.2||1.3||-0.4||0.4||0.3|
|Total domestic demand||2.6||1.3||-1.1||-3.6||3.2||2.0||2.2|
|Final domestic demand||2.5||1.5||-0.6||-3.1||1.9||2.0||2.1|
|Private final consumption||2.9||2.4||-0.3||-1.2||1.7||2.5||2.0|
|Public consumption expenditure||1.0||1.3||2.5||1.9||0.9||-1.7||-1.0|
|Gross fixed domestic investment||2.5||-1.2||-4.5||-14.8||3.3||4.0||6.0|
|Private fixed investment||2.3||-1.8||-6.4||-18.3||3.9||5.3||7.5|
|Public fixed investment||3.3||1.7||4.3||0.2||1.3||-0.6||0.7|
|Change in private inventories 1/||0.1||-0.2||-0.5||-0.7||1.4||0.1||0.1|
|GDP in current prices||6.0||4.9||2.2||-1.7||3.8||4.0||3.9|
|Employment and inflation|
|Federal government (budget, fiscal years)|
|Federal balance (percent of GDP)||-1.9||-1.2||-3.2||-11.4||-9.6||-9.3||-7.6|
|Debt held by the public (percent of GDP)||36.5||36.2||40.3||53.5||62.1||70.2||74.6|
|General government (GFSM 2001, calendar years)|
|Net lending (percent of GDP)||-2.0||-2.7||-6.5||-12.7||-10.3||-9.9||-7.8|
|Structural balance (percent of potential nominal GDP)||-2.0||-2.2||-4.6||-6.8||-7.2||-7.2||-5.8|
|Gross debt (percent of GDP)||61.0||62.2||71.2||84.2||93.5||99.0||103.0|
|Interest rates (percent)|
|Three-month Treasury bill rate||4.8||4.5||1.4||0.2||0.1||0.2||0.4|
|Ten-year government bond rate||4.8||4.6||3.7||3.3||3.2||3.5||4.4|
|Balance of payments|
|Current account balance (billions of dollars)||-803||-718||-669||-378||-470||-489||-410|
|Percent of GDP||-6.0||-5.1||-4.7||-2.7||-3.2||-3.2||-2.6|
|Merchandise trade balance (billions of dollars)||-839||-823||-835||-507||-647||-703||-702|
|Percent of GDP||-6.3||-5.9||-5.8||-3.6||-4.4||-4.6||-4.4|
|Balance on invisibles (billions of dollars)||37||105||166||129||177||214||293|
|Percent of GDP||0.3||0.7||1.2||0.9||1.2||1.4||1.8|
|Saving and investment (percent of GDP)|
|Gross national saving||16.2||14.3||12.4||10.9||11.6||12.3||14.1|
|Gross domestic investment||20.5||19.6||18.0||14.8||15.9||16.1||16.7|
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the First Deputy Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm