United States
Staff Report for the 2000 Article IV Consultation
Author: International Monetary Fund
Publication Date:
27 Jul 2000
eISBN:
9781451839524
Language:
English
Keywords:
ISCR; CR; core inflation; inflation expectation; CBO's budget outlook; productivity slowdown; federal funds rate; current account; exchange rate; potential GDP; economic expansion; debt service; Administration in revenue administration; Productivity; Global; unemployment rate
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Sound monetary and fiscal policies have contributed to making the current U.S. economic expansion the longest on record. Executive Directors welcomed these developments, and congratulated the U.S. authorities on the adoption of the Gramm-Leach-Bliley Act, which represents a much needed overhaul of the outdated laws regulating the financial sector in the country. They commended the improvements in market access provided by the enacted African Growth and Opportunity Act and the Caribbean Basin Initiative, and encouraged the U.S. government to complete the necessary financing arrangements.

Abstract

Sound monetary and fiscal policies have contributed to making the current U.S. economic expansion the longest on record. Executive Directors welcomed these developments, and congratulated the U.S. authorities on the adoption of the Gramm-Leach-Bliley Act, which represents a much needed overhaul of the outdated laws regulating the financial sector in the country. They commended the improvements in market access provided by the enacted African Growth and Opportunity Act and the Caribbean Basin Initiative, and encouraged the U.S. government to complete the necessary financing arrangements.

I. Introduction1

1. The staff report for the previous Article IV consultation discussions was considered by the Executive Board on July 30, 1999 (EBM/99/85).2 Executive Directors noted that the United States had been the principal engine of growth during and in the aftermath of the period of global turbulence, and that U.S. monetary policy had played a key role in stabilizing international financial markets. In the period ahead, however, Directors agreed that U.S. growth would need to slow to a rate more in line with the economy’s long-run potential. Although the performance of the U.S. economy had been remarkable, Directors cautioned that there were significant risks to the outlook, including large gains in wealth that had fueled strong consumption; a sharp widening in the current account deficit owing to the rapid pace of domestic demand growth and the appreciation of the dollar; and a reversal of some of the factors—such as declining commodity prices—which had contributed to the favorable inflation performance. Unless there were evidence that the strength of demand growth was abating, the authorities might need to tighten monetary policy further to ensure that the expansion remained on a sustainable, non-inflationary path. Directors supported efforts to preserve a substantial portion of the federal budget surpluses over the medium term. Moreover, Directors stressed that prompt measures were needed to address the long-term imbalances facing Social Security and Medicare. Directors also agreed that the appreciation of the U.S. dollar had sparked a worrisome degree of protectionist sentiment, and emphasized that these pressures should be resisted.

II. Economic Developments and Outlook

A. Recent Economic Developments

2. Economic activity in the United States continued briskly during 1999, and the current expansion entered its 111th month in June 2000, the longest economic expansion on record3 The economy grew at a blistering pace of 6½ percent in the second half of 1999, bringing growth for the year to 4 ¼ percent—the fourth consecutive year that growth has been around 4 percent. Growth slowed only slightly to around a 5½ percent annual rate in the first quarter of 2000 (Table 1, Figure 1). Some recent indicators provide early signs of moderating growth in the second quarter as the growth of consumer spending, home purchases, and factory orders all slowed. With domestic demand growth exceeding supply, the current account deficit widened sharply in 1999, and as a result net exports to the United States continued to provide an important stimulus to growth in the rest of the world (Box 1).

Figure 1.
Figure 1.

United States: Real GDP and Domestic Demand

(Percentage change, same quarter previous year)

Citation: IMF Staff Country Reports 2000, 089; 10.5089/9781451839524.002.A001

Table 1.

United States: Historical Economic indicators

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Sources: U.S. Department of Commerce, Bureau of Economic Analysis; and Board of Governors of the Federal Reserve System.

Contribution to GDP growth.

Private nonfarm business sector.

Business sector, in chained 1996 dollars except for historical averages which are in chained 1992 dollars.

Monthly average on a unit labor cost basis (1990=100).

Yearly average.

On a NIPA basis.

As a percent of potential GDP.

Overall balance – i.e., current balance minus net investment.

Gross national saving does not equal gross domestic investment and net foreign investment because of capital grants and statistical discrepancy. Net national saving and net private investment are expressed in percent of NNP.

3. As has been true for the last several years, robust personal consumption and investment spending have been the driving forces behind the rapid rate of growth in GDP (Figure 2). Personal consumption spending in 1999 increased by 5¼ percent in real terms and at an annual rate of 7½ percent in the first quarter of 2000. The strength of consumer spending, most of which was concentrated in durable goods, has been sustained by the high level of consumer confidence, gains in personal disposable income, and increases in household net wealth, with the latter largely reflecting gains in equity prices that have exceeded those in most other major industrial countries (Figures 3 and 4, and Box 2). Most empirical evidence suggests that each additional dollar of equity wealth boosts household consumption by two to four cents over a two-year period; the staff’s most recent estimate falls at the lower end of this range. The Federal Reserve estimates that consumption fueled by capital gains in excess of income growth has contributed about 1 percentage point to the overall annual growth in real domestic purchases over the past five years.4 Despite significant gains in stock prices in other major industrial countries, wealth effects on consumption have been bigger in the United States owing to the larger number of households holding equities and relatively higher estimates of U.S. spending out of wealth (Box 3). Moreover, with the increase in consumption outpacing income growth, personal saving as a share of GDP declined to a new low in the first quarter of 2000 (Figure 5).

Figure 2.
Figure 2.

United States: Consumption and Investment

(Percentage change, same quarter previous year)

Citation: IMF Staff Country Reports 2000, 089; 10.5089/9781451839524.002.A001

Figure 3.
Figure 3.

United States: Stock Market Developments

Citation: IMF Staff Country Reports 2000, 089; 10.5089/9781451839524.002.A001

Figure 4.
Figure 4.

International Comparison Stock Market Developments

Citation: IMF Staff Country Reports 2000, 089; 10.5089/9781451839524.002.A001

The Contribution of Net Trade with the United States to Economic Growth: An International Perspective

Because of its size and close linkages with the world economy, changes in the U.S. economy can have large effects on other countries. While the full effects of trade on growth are more complicated, a simple measure of the impact on a country of trade with the United States is the direct contribution of net exports to the United States to the country’s real GDP growth (captured by the change in net exports as a percent of GDP in the previous year). During 1992–98, net exports to the United States was an important contributor to growth in many industrial and developing countries, with Canada, Mexico, China, and some of the emerging Asian economies being the main beneficiaries.

Among the industrial countries, the contribution of net exports to the United States to GDP growth was the largest in Canada, reflecting the very large share of the United States in Canada’s trade, as well as the effects of a real depreciation of the Canadian dollar vis-à-vis the U.S. dollar. Among the European countries, net exports to the United States made only a modest contribution to growth, owing to the relatively small share of the United States in their foreign trade. In Australia, the contribution of net exports to the United States turned positive in 1997–98, partly the result of a large real depreciation of the Australian dollar.

In Asia, net exports to the United States helped to cushion the impact of the 1997–98 financial crisis on growth. The sharp decline in growth in Japan, as well as in Indonesia, Korea, Malaysia, and Thailand, was accompanied by large adjustments in their external sectors as domestic demand slowed and exchange rates depreciated substantially. Contributions to growth from trade with the United States were largest for Thailand, Korea, China, and Malaysia, although only in the case of China was the impact of U.S. demand predominant.

In Argentina and Brazil, a rising deficit with the United States was reflected in a negative contribution to growth. In Chile, a real depreciation of the peso against the U.S. dollar in 1998 contributed to a narrowing of the deficit with the United States. In Mexico, a substantial increase in net exports to the United States, provided a significant boost to the economic recovery after 1995. In Israel, the improvement in the overall trade balance in recent years was underpinned by a strengthening of net exports to the United States. In South Africa, the trade deficit with the United States continued to widen, reflected in a small negative contribution to growth.

Selected Countries: Contribution to Real GDP Growth of Net Exports of Goods and Nonfactor Services to the United States, 1992–981/

(In percentage points, unless otherwise noted)

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Sources: Based on national accounts data from the World Economic Outlook: and bilateral trade data from the U.S. Department of Commerce, Bureau of Economic Analysis. Bilateral data on non-factor services trade were not available for several countries, including Eastern European countries and most countries in Africa and the Middle East.

Data refer to the annual average during the period shown.

4. Investment spending increased by 8 percent in 1999, contributing about 1 percentage point to overall growth in GDP, and rose at an almost 20 percent annual rate in the first quarter of 2000. Spending on equipment and software—owing to strong business confidence and pressures on capacity, continued sharp declines in computer prices, and the drive to adopt new technologies—accounted for most of the increase. Residential investment spending continued at a brisk pace. Although moderating in the second half of 1999, reflecting an uptick in mortgage rates, it rebounded in the first quarter of 2000.

Figure 5.
Figure 5.

United States: Components of Gross Private Saving

(In percent of GDP)

Citation: IMF Staff Country Reports 2000, 089; 10.5089/9781451839524.002.A001

Figure 6.
Figure 6.

United States: Current Account

Citation: IMF Staff Country Reports 2000, 089; 10.5089/9781451839524.002.A001

The Distribution of Wealth Gains and the Effects on Consumption

The important role of financial wealth in driving consumption growth in the United States in recent years highlights the potential implications for macroeconomic activity and household balance sheets of a sharp correction in asset prices. The implications would depend in part on the distribution of the gains in wealth and consumption across households.

During 1995–98, the largest gains both in wealth and in consumption were concentrated among house-holds in the upper income groups. Households in the top two income groups (annual incomes of $50,000 and above) accounted for 98 percent of the total gain in household wealth (see tabulation), and those in the top two quintiles of the income distribution accounted for 67 percent of the gain in household consumption.

The large share of upper income groups in the wealth gains owed partly to their dominant share in stock holdings. Although stock ownership became more widespread during 1995–98, the higher income groups continued to account for the bulk of the value of stock holdings. The proportion of households having direct or indirect holdings of stock rose from 40 percent of total households in 1995 to 49 percent in 1998. The share of the top two income groups in the value of households’ stock holdings rose somewhat to 84 percent. The most important asset among households outside the top income group continued to be real estate. The modest rise in real estate prices compared with stock prices thus contributed to the unevenness in the distribution of wealth gains.

The gains in net wealth occurred simultaneously with an increase in household debt relative to estimated after-tax income (from 96 percent in 1995 to 105 percent in 1998). The top two income groups accounted for virtually all of the increase in household debt.

Household Wealth by Income Groups

(In billions of 1998 U.S. dollars)

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Sources: Data on wealth are based on the Board of Governors of the Federal Reserve 1998 Survey of Consumer Finances; and Federal Reserve Bulletin (January 2000). Data on consumption referred to in the text above are from the U.S. Bureau of Labor Statistics (Consumer Expenditure Survey, various years).

Direct and indirect holdings of stock.

Owner occupied and other residential real estate.

Stock Market Wealth and Household Consumption: A Cross-Country Comparison

In comparison with other countries, stock holdings are a relatively important part of household wealth in the United States. In 1998, the proportion of U.S. households that held stocks either directly or indirectly was 49 percent, compared with 7 percent in Germany and 19 percent in Italy.

In turn, the ratio of equity holdings in relation to household wealth is relatively high in the United States, and has contributed to the view that the wealth effect on consumption from a change in stock market wealth may be larger in the United States than in other countries (see tabulation).

Selected Countries: Households’ Equity Holdings/Net Financial Wealth

(in percent)

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Source: OECD Economic Outlook, 1999, Table 58.

1997.

Selected Countries: Effects on Private Consumption of a 10 Percent Decline in Stock Market Wealth

(in percent)1/

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Source: Boone, Giorno, and Richardson (1998), “Stock Market Fluctuations and Consumption Behavior,” OECD Working Paper No. 208, Table 3.

The calculations are based on 1997 data and assume that the marginal propensity to consume out of wealth in all countries is the same as in the United States.

5. Providing a safety valve to the rapid pace of domestic demand growth, net exports subtracted a little over 1 percentage point from GDP growth in 1999 and in the first quarter of 2000. The current account deficit widened to 3.6 percent of GDP ($331 billion) from 2.5 percent of GDP in 1998, largely because of a further increase in the merchandise trade deficit (Table 2 and Figure 6). Continued rapid import volume growth more than offset a pickup in export volume growth, which was driven by the economic recovery in partner countries during the second half of 1999 (Figure 7). The surplus on nonfactor services stayed unchanged as a percentage of GDP, while the deficit on net investment income increased slightly. In recent years, the major counterpart to large current account deficits in the United States has been persistently large current account surpluses in Japan and to a lesser extent in the Euro area, but in 1999 substantial improvements in the external positions of the developing countries corresponded to the further deterioration in the U.S. external balance (Figure 8).

Table 2.

United States: Balance of Payments

(In billions of dollars)

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Source: U.S. Department of Commerce, Bureau of Economic Analysis.
Figure 7.
Figure 7.

International Comparison: Real GDP Growth

(annual percent change)

Citation: IMF Staff Country Reports 2000, 089; 10.5089/9781451839524.002.A001

Figure 8.
Figure 8.

International Comparison: Current Account Balances

(In percent of GDP)

Citation: IMF Staff Country Reports 2000, 089; 10.5089/9781451839524.002.A001

6. The financing for the large U.S. current account deficit in 1999 mainly reflected net foreign purchases of private U.S. securities—including large purchases of equities, corporate bonds, and government securities—and net direct investment inflows. With the continued deterioration in the current account and strong capital inflows, the net foreign liability position of the United States rose from 14 percent of GDP at end–1998 to an estimated 17 percent of GDP at end–1999. Estimates suggest that foreign ownership now accounts for 25 percent of the stock of Treasury securities held by the public, about 20 percent of the corporate bond market, and 7 percent of the equity market; all these shares have increased significantly during the 1990s.

7. Despite U.S. gross national saving that is low in relation to historical standards and by international comparisons, the falling cost of capital equipment has helped the United States to achieve levels of real private investment that are substantially higher than in the past. After rising for the past five years, gross national saving as a share of GDP in 1999 remained unchanged at 18% percent, reflecting a further decline in personal saving, which offset higher government saving (Figure 9). Measured in nominal terms, gross private domestic investment as a share of GDP in 1999 was substantially above its average for the 1970s and 1980s. Measured in real terms, the differences were even larger more—than 4 percentage points above its historical average. Real fixed private investment in the United States rose to 18 percent of real GDP in 1999, only slightly below the G-7 average (Table 3).5 This narrowing of the gap with respect to other G-7 countries (particularly with respect to Japan and Germany, the largest “investors” in the group) reflects the relatively cheaper cost of capital in the United States compared to most other G-7 countries, with the exception of Canada (Figure 10).6 It Figure 10. International Comparison: Relative Cost of Capital also reflects the larger proportion of U.S. fixed investment that represents purchases of computer equipment and software; real investment in information technology in the United States was one third of real fixed private investment in 1999, more than double the level of 1990. Over the period 1995–99, the price deflator for investment in computers and peripheral equipment fell at an average annual rate of 24 percent.

Table 3.

United States: Indicators of Economic Performance

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Source: Staff estimates for the World Economic Outlook.

Data refer to unified Germany.

Composites for the country groups are averages of individual countries weighted by the average value of their respective GDPs converted using PPP weights over the preceding three years.

Includes statistical discrepancies.

Figure 9.
Figure 9.

United States: Trends in U.S. Saving

(In percent of GDP)

Citation: IMF Staff Country Reports 2000, 089; 10.5089/9781451839524.002.A001

Figure 10.
Figure 10.

Internalional Comparison: Relative Cost of Capital

(1990=100 Rice index of fixed pnvale investment relative to CPI)

Citation: IMF Staff Country Reports 2000, 089; 10.5089/9781451839524.002.A001

8. For the fourth consecutive year, annual growth in real GDP exceeded the staffs estimates of the long-term trend growth rate in potential output of about 3% percent, and the unemployment rate fell to a 30-year low (Figure 11).7 The unemployment rate at 4.1 percent in May 2000 is below the lower range of most recent estimates of the NAIRU.8 Employment growth remained strong in 1999, particularly in the service sector, which more than offset a decline in manufacturing employment (Figure 12).9 During the current expansion, employment growth has increased at an average annual rate of 1 3/4 percent, far outpacing employment growth in other G-7 countries, with the exception of Canada (Table 4). Capacity utilization in the manufacturing sector edged down to around 80 percent in 1999—owing to the weakness in export growth during the first part of the year and continued strong investment—but it increased in early 2000, and held steady at 81 1/2 percent in May 2000, just below its historical average.

Table 4.

G-7 Countries: Labor Market Indicators.1

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Source: U.S. Department of Labor, Bureau of Labor Statistics.

Country data are adjusted to be consistent with U.S. concepts.

In the manufacturing sector.

For Germany the average is from 1992 to 1998.

Figure 11.
Figure 11.

United States: Output Cap

(In percent)

Citation: IMF Staff Country Reports 2000, 089; 10.5089/9781451839524.002.A001

1/ Actual less potential, a percent of potential GOP.
Figure 12.
Figure 12.

United States: Employment Growth and the Unemployment Rate

Citation: IMF Staff Country Reports 2000, 089; 10.5089/9781451839524.002.A001

9. Despite the high level of resource utilization, core inflation remained largely subdued in 1999 and early 2000, owing to strong gains in productivity and a continued slow rise in non-oil import prices, but more recent data provide a mixed picture about possible emerging price and wage pressures (Figure 13). Consumer price inflation rose to about 3 percent in 1999 and the first two months of 2000, largely the result of higher energy prices. Increases in the core-CPI (excluding food and energy) remained subdued at a 2 percent annual rate. In March, however, core-CPI inflation picked up sharply primarily because of an increase in transportation services owing to higher fuel costs, but it settled back down to a 2 percent annual rate in April and May as some of the previous increases in transportation were reversed. The chain-type price index for personal consumption expenditures (PCE) increased by 2 percent in 1999, while the core-PCE rose by just 1 ½ percent. In the first quarter of 2000, core-PCE inflation picked up slightly to 1¾ percent.10

Figure 13.
Figure 13.

United States: Indicatots of Inflation

(Percentage change, same period previous year)

Citation: IMF Staff Country Reports 2000, 089; 10.5089/9781451839524.002.A001

Inflation

(Percentage change, December over December)

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Core inflation rates exclude changes in food and energy prices.

Fourth quarter over fourth quarter.

May 2000/December 1999 annualized for CPI, PPI, and average hourly earnings; 2000Q1/199Q4 annualized for employment cost index, and unit labor costs.

10. Growth in wages and other labor compensation was moderate in 1999, with the employment cost index increasing at roughly the same rate as a year earlier. But, the index rose sharply in the first quarter of 2000, advancing at an annual rate of nearly 6 percent, with a pickup in both wages and benefits costs. Growth in labor productivity (output per man hour) increased to 3½ percent during 1999, from 3 percent during 1998, with especially strong gains in the second half of the year. As a result, the growth in unit labor costs fell to ½ A percent in 1999, down from 2 percent a year earlier. In the first quarter of 2000, labor productivity growth slowed to an average annual rate of 2½ percent, and unit labor costs increased by about 1½ percent.

11. The combination of continued robust growth and low inflation has led some observers to conclude that a “new” economy has emerged in the United States, although interpretations of what is “new" differ (Box 4). Recent empirical evidence (discussed in the forthcoming background paper) suggests that the production and use of information technology (IT) explain much of the acceleration in labor productivity growth during the current expansion. Greater efficiencies achieved in producing computers and semiconductors have boosted productivity, which is evidenced by the plunging prices for these types of goods. These price declines have stimulated investment in information technology by other industries, contributing to capital deepening and further boosting labor productivity. However, claims that these changes have led to a “permanent” increase in productivity growth are premature. In the past, waves of technological innovations have permanently increased the level of productivity, but they have led to only temporary increases in productivity growth as the new technologies were adopted (or diffused) throughout the economy. Nevertheless, this process of adoption and implementation of new technology could play out over some time, giving rise to higher productivity growth for an extended period.

12. From an international perspective, the positive impact of new technologies has been more significant so far in the United States than in other industrial economies. This may in part reflect the greater relative importance of the computer and semiconductor industries in U.S. output.11 It may also reflect the greater flexibility of product and labor markets in the United States. This flexibility—which facilitates entry into new markets, the introduction of new products, and the re-organization of work processes—fosters an environment conducive to reaping the benefits from adopting the new information technology. Among the major industrial countries, the United States has consistently ranked first in IT expenditures as a percent of GDP, although the differences appear to have narrowed recently (Figure 14).

Figure 14.
Figure 14.

International Comparison: IT Expenditures

(In percent of CUP)

Citation: IMF Staff Country Reports 2000, 089; 10.5089/9781451839524.002.A001

What is the “New Economy?”

Strong economic growth combined with low inflation and a pickup in productivity growth has led many observers of U.S. economic conditions to proclaim the existence of a “new economy” in the United States. The adoption of new technologies and globalization are seen as altering underlying economic relationships. Despite the attention that the term has received, there is little consensus on what is different and whether such differences have fundamentally changed the economy. The interpretations on what constitutes the “new economy” can be organized into three different but related categories:

  • The long-run growth view. In this interpretation, higher long-term growth is achieved owing to a permanently higher growth rate in productivity that stems primarily from the adoption of and continued innovation in information technology (IT), as well as from the effects of globalization, and deregulation. Empirical evidence suggests that there is a link between using and producing computers and the pickup in labor productivity in the second half of the 1990s. However, based on available data, it is not possible to conclude that the shift to higher productivity growth is sustainable. The substantial increase in productivity associated with IT experienced in recent years may simply represent a one-time period of transition to a higher level of productivity because of a major change in technology. This can be considered an “old economy” process, in the sense that it represents the traditional process of development, adoption, and diffusion of new technologies.

  • The resource utilization view. This version of the “new economy” is based on the observation that during the recent expansion unemployment has declined below most estimates of NAIRU without spurring inflation. It is argued that inflationary pressures in the United States have remained subdued because of globalization and IT, which has increased productivity, and efficiency. For example, better access to information allows firms to improve inventory management and new capacity can be brought on line with shorter lead times owing to streamlining of the design and delivery process. Moreover, because actual productivity is increasing faster than what workers perceive, wage demands are muted. Accordingly, labor and other utilization rates can be higher without triggering inflationary pressures, and it appears as though NAIRU has declined. At present, however, it is extremely difficult to disentangle whether the decline in NAIRU is permanent or simply related to temporary factors, such as the period of time it takes for workers to incorporate higher trend productivity into wage demands. In addition, positive supply shocks—for example, the past weakness in commodity prices, the strength of the U.S. dollar, and restrained health care costs—may have temporarily reduced inflationary pressures, but have not changed any of the underlying relationships in the economy.

  • The positive feedback view. In this view, “the new economy” is characterized by a pickup of total factor productivity growth in various sectors which is based on the adoption of IT and results in increasing returns to scale, other network economies, and positive spillover effects. In other words, investment in IT in one firm improves the productivity of other firms, as they are able to work together more efficiently. Although there is anecdotal evidence, there is to date little solid empirical evidence that such positive feedback effects across industries are more important now than in the past.

13. By mid-1999, concerns about persistent domestic demand growth in excess of the growth in potential output and further tightening in labor markets prompted the Federal Reserve to tighten monetary policy. Over the period June 1999 to May 2000, the Federal Reserve raised the federal funds rate by 175 basis points, including successive increases at four consecutive FOMC meetings, culminating in a 50 basis point increase in May. At its June meeting, the FOMC decided to leave the federal funds rate unchanged, but in its announcement following the meeting, the FOMC indicated that the risks continued to be weighted mainly toward conditions that may generate heightened inflationary pressures in the foreseeable future.

14. In the second half of 1999, as the federal funds target rate was raised, the yield curve flattened, with the spread between three-month and ten-year Treasury securities narrowing substantially (Figure 15). During the first quarter of 2000, the yield curve beyond two years became inverted as the yields on longer-term Treasury bonds fell sharply. This development followed the Treasury’s announcement that it would begin to buy back Treasury securities, which was interpreted by market participants as implying that the supply of longer-term Treasuries would decline relative to shorter-term maturities. Real interest rates have risen over the past year, with an increased demand for funds possibly reflecting improved rates of return on investment in the United States (Figures 16 and Figures 17).

Figure 15.
Figure 15.

United States: Investment Rates

(In percent)

Citation: IMF Staff Country Reports 2000, 089; 10.5089/9781451839524.002.A001

Figure 16
Figure 16

United States: Interest Rates in Real Terms

(In percent)

Citation: IMF Staff Country Reports 2000, 089; 10.5089/9781451839524.002.A001

Figure 17.
Figure 17.

United States: Corporate Yield Spreads

(Basis points on 10-year Treasury note)

Citation: IMF Staff Country Reports 2000, 089; 10.5089/9781451839524.002.A001

15. The recent behavior of the “traditional” yield curve suggests that the yields on longer-term Treasury securities will become a less useful benchmark for the risk-free interest rate, if the projected fiscal budget surpluses materialize and Treasury debt is retired over time. Increasingly, other fixed-income securities are being considered as alternative benchmarks, including interest rate swaps, federal government agency debt (for example, Fannie Mae, and Freddie Mac), and corporate debt. The spreads between three-month Treasury bills and these ten-year securities have also narrowed (Figure 18).

Figure 18.
Figure 18.

United States: Alternatives Yield Curve Spreads

(Spreads ever the 3-month T-bills, in basis points)

Citation: IMF Staff Country Reports 2000, 089; 10.5089/9781451839524.002.A001

16. In real effective terms, the dollar appreciated by 3½ percent in 1999 and by a further 7½ percent in the first five months of 2000 (Figure 19). A 12 percent depreciation against the Japanese yen during 1999 was more than offset by a 14½ percent appreciation of the dollar against the euro. In the first five months of 2000, the dollar appreciated modestly against the yen, but more sharply against the euro. In real effective terms, the dollar in May 2000 was 39 percent higher than its low in April-July 1995. According to the latest Coordinating Group on Exchange Rates (CGER) assessment, the dollar in mid–2000 is at least 20 percent stronger than its medium-run equilibrium level.

Figure 19.
Figure 19.

United States: Bilateral and Real Effective Exchange Rate

(Index i996=100)

Citation: IMF Staff Country Reports 2000, 089; 10.5089/9781451839524.002.A001

17. The fiscal position strengthened further during 1999, as the unified federal budget achieved a larger surplus than in 1998—with most of the increase estimated to be structural (see Table 1)—marking the first back-to-back budget surpluses in 40 years. 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 11 /2 percent of GDP ($124 billion) in FY 1999.12 Continuing the pattern of recent years, most of the increase in the unified surplus in FY 1999 reflected an increase in the on-budget balance. In the FY 2001 Budget issued in February 2000, the Administration estimated that the FY 2000 unified federal surplus would rise to $179 billion (nearly 2 percent of GDP; Figure 20). In the Mid-Session Review of the FY 2001 Budget released in late June 2000, the Administration revised its estimate of the FY 2000 surplus up to $224 billion (2% percent of GDP). The steady improvement in the fiscal balance is in large part the outcome of policy measures enacted since 1992, chiefly the Omnibus Budget Reconciliation Act of 1993 (OBRA93) and the Balanced Budget Act (BBA) of 1997.13 These Acts included expenditure cuts and tax increases, as well as an extension through FY 2002 of existing budget enforcement provisions, including caps on discretionary spending and a pay-as-you-go (PAYGO) requirement under which any legislation that reduced revenues or raised mandatory spending had to specify offsetting measures such that the deficit would not increase. By end FY 1999, federal debt held by the public declined to 40 percent of GDP. The state and local government budget deficit (national accounts basis) remained essentially unchanged in 1999 at about 1/2 percent of GDP.14

Figure 20.
Figure 20.

Unitai States Administration’s Budget Projections

(In percent of GDP; fiscal years)

Citation: IMF Staff Country Reports 2000, 089; 10.5089/9781451839524.002.A001

B. The Outlook

18. The staff projects a slowdown in real GDP growth to an annual rate of 4 1/4 percent in the second quarter of 2000, and a further deceleration to around 3 percent in the second half of the year, implying an average growth of 4.9 percent for the year (Table 5). As the impact of the Federal Reserve’s past and prospective tightening in monetary policy takes hold, consumption and investment spending are expected to ease. A substantially slower rise in household wealth is also expected to reduce consumption growth. After 2000, the economy would continue to grow at around 3 percent, slightly below potential. Although net exports are projected to be less of a drag on growth in 2000, the current account deficit is expected to remain roughly at its fourth quarter 1999 level of 4¼ percent of GDP in 2000 and close to this level over the medium term, as some narrowing in the trade deficit owing to relatively stronger growth in the rest of the world is largely offset by a further deterioration in net investment income. The current account projection is based on the standard WEO assumption that the dollar’s real effective exchange rate remains constant throughout the forecast period. If this assumption were relaxed, it would be expected that the real effective dollar exchange rate would depreciate and the current account deficit would narrow. Staff estimates suggest that a current account deficit of 1 ½ to 2 percent of GDP would be sustainable over the long term, although such estimates are clearly subject to considerable uncertainty.15

Table 5.

United States: Economic Outlook

(In percent changes from previous year, unless otherwise indicated)

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Source: Staff estimates.

Contribution to GDP growth.

Fiscal year. Projections assume that the Administration’s FY2001 budget proposal is adopted as described in the Mid-Session Review of the United States Government: Fiscal Year 2001 and represent staff estimates that adjust for the difference between the Administration and staff macroeconomic assumptions.