Front Matter Page
© 2000 International Monetary Fund
July 2000
IMF Staff Country Report No. 00/89
United States: Staff Report for the 2000 Article IV Consultation
As required under Article IV of its Articles of Agreement, the International Monetary Fund conducts periodic consultations with its member countries. In the context of the 2000 Article IV consultation with the United States, the following documents have been released and are included in this package:
the staff report for the 2000 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on June 19, 2000, with the officials of the United States on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on June 30, 2000. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF;
a staff statement released the day of the Board discussion of July 21, 2000, updating information on recent economic developments;
the Public Information Notice (PIN), which summarizes the views of the Executive Board as expressed during the July 21, 2000, Executive Board discussion of the staff report that concluded the Article IV consultation.
Further background documentation prepared by IMF staff for the consultation may be published separately at a later date. The policy of publication of Article IV staff reports and PINS allows for the deletion of market-sensitive information.
The Article IV staff report is published—both in hard copy and on the IMF’s website (http://www.imf.org)—as part of a pilot project. To assist the IMF in evaluating the pilot project for release of Article IV staff reports, reader comments are invited prior to October 5, 2000, and may be sent by e-mail to Pilotproject@imf.org.
Copies of this report are available to the public from
International Monetary Fund • Publication Services
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International Monetary Fund
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Front Matter Page
INTERNATIONAL MONETARY FUND
UNITED STATES OF AMERICA
Staff Report for the 2000 Article IV Consultation
Prepared by the Staff Representatives for the 2000 Consultation with the United States
Approved by Claudio M. Loser and G. Russell Kincaid
June 29, 2000
Contents
Executive Summary
I. Introduction
II. Economic Developments and Outlook
A. Recent Economic Developments
B. The Outlook
III. Policy Discussions
A. Economic Conditions and Prospects
B. Monetary Policy and the Exchange Rate
C. Fiscal Policy
D. Other Issues
IV. Staff Appraisal
Boxes
1. The Contribution of Net Trade with the United States to Economic Growth: An International Perspective
2. The Distribution of Wealth Gains and the Effects on Consumption
3. Stock Market Wealth and Household Consumption: A Cross-Country Comparison
4. What is the “New Economy?”
5. Private Sector Saving-Investment Balances
6. Household and Corporate Balance Sheets
7. A Comparison of Japan in 1985–90 and the United States in 1994–99
8. Recent Indicators of the Quality of Bank Credit and Banking Sector Vulnerabilities
Appendices
I. Fund Relations
II. Core Statistical Indicators
Tables
1. Historical Economic Indicators
2. Balance of Payments
3. Indicators of Economic Performance
4. G-7 Countries: Labor Market Indicators
5. Economic Outlook
6. “Harder Landing” Scenario
7. Fiscal Indicators, based on FY 2001 Budget
8. Fiscal Indicators, based on Mid-Session Review
9. Net Official Development Assistance Flows, 1998–99
10. Outlays for Foreign Assistance on a Budget Basis
11. Indicators of External and Financial Vulnerability
Figures
1. Real GDP and Domestic Demand
2. Consumption and Investment
3. Stock Market Developments
4. International Comparison: Stock Market Developments
5. Components of Gross Private Savings
6. Current Account
7. International Comparison: Real GDP Growth
8. International Comparison: Current Account Balances
9. Trends in U.S. Saving
10. International Comparison: Relative Cost of Capital
11. Output Gap
12. Employment Growth and the Unemployment Rate
13. Indicators of Inflation
14. International Comparison: IT Expenditures
15. Interest Rates
16. Interest Rates in Real Terms
17. Corporate Yield Spreads
18. Alternative Yield Curve Spreads
19. Bilateral and Real Effective Exchanges Rate
20. Administration’s Budget Projection
Executive Summary
Economic setting
Real GDP grew by 4¼ percent in 1999 and by 5½ percent (annual rate) in the first quarter of 2000, exceeding the staffs estimate of a 3¼percent growth rate for potential output. The current account deficit widened to 3.6 percent of GDP in 1999 from 2.5 percent of GDP in 1998, largely because of a further increase in the merchandise trade deficit.
The unemployment rate has remained around 4 percent since the fourth quarter of 1999—a 30-year low and well below the lower end of the range of most recent estimates of the NAIRU.
Core-CPI inflation remained subdued at a 2 percent annual rate during 1999 and the first two months of 2000. After picking up sharply in March, largely because of an increase in transportation services owing to higher fuel costs, core inflation settled back down to a 2 percent annual rate in April and May.
The Federal Reserve tightened monetary policy over the last year, raising the federal funds rate by 175 basis points, including a 50 basis point increase in May 2000. The FOMC left the federal funds rate unchanged at its meeting in June.
The unified federal budget balance moved into surplus in FY 1998 (¾ percent of GDP) for the first time since FY 1969, and the surplus increased to 1½ percent of GDP in FY 1999. Estimates for FY 2000 suggest a surplus of just over 2 percent of GDP.
Policy issues
The need to slow U.S. aggregate domestic demand growth to a sustainable noninflationary level, while other countries promote sustained expansion of their economies, in order to rebalance global demand and mitigate the risk of an abrupt reversal in the external imbalances among major industrial countries.
Whether additional monetary policy action is likely to be required to ensure that inflation remains under control.
Whether the accumulation of debt by U.S. households and corporations as equity prices have soared suggests there may be significant vulnerabilities to a sudden economic slowdown.
Preserving the rising fiscal surpluses in prospect in order for fiscal policy to assist in restraining domestic demand growth in the near term and to address the looming financial needs of Social Security and Medicare in the longer term.
Staff views
A further tightening of monetary policy may be required to rein in U.S. demand growth and ensure that inflation remains under control. How much more interest rates will need to be increased will depend on how the economy responds to past and subsequent steps to tighten policy, and whether there are indications of emerging wage and price pressures in the period ahead.
Fiscal policy also has an important role to play in restraining domestic demand growth in the near term. By helping to raise the level of national saving, maintaining a tight fiscal position would also help to ensure an orderly correction in the current account imbalance and in the real value of the dollar over the medium term.
Eliminating the public debt over the next decade would be an important step in preparing the federal government to meet the costs of an aging population. However, to meet these obligations fully, the unified federal budget balance may need to remain in surplus for a while, even after the public debt has been retired. A reasonable medium-term fiscal policy approach consistent with this objective could be to adopt measures to eliminate the actuarial imbalances facing Social Security and Medicare HI (which would entail continuing to build surpluses in these accounts for an extended period), and then keep the remainder of the budget roughly in balance on average over the business cycle.
Although at present there do not appear to be major vulnerabilities in the banking sector that could contribute to triggering a downturn in U. S. economic activity, a pre-emptive approach to supervision needs to be maintained to limit the scope for potential future financial distress.
Front Matter Page
Public Information Notice (PIN) No. 00/52
FOR IMMEDIATE RELEASE
July 28, 2000
International Monetary Fund
700 19th Street, NW
Washington, D. C. 20431 USA
