Front Matter Page
© 2007 International Monetary Fund
August 2007
IMF Country Report No.07/264
United States: 2007 Article IV Consultation—Staff Report; Staff Statement; and Public Information Notice on the Executive Board Discussion
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2007 Article IV consultation with the United States, the following documents have been released and are included in this package:
The staff report for the 2007 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on June 15, 2007, 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 July 11, 2007. 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 of July 27, 2007 updating information on recent developments.
A Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its July 27, 2007 discussion of the staff report that concluded the Article IV consultation.
The documents listed below have been or will be separately released.
Information Note on the United States Fiscal Data
Selected Issues Paper
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to publicationpolicy@imf.org.
Copies of this report are available to the public from
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Front Matter Page
INTERNATIONAL MONETARY FUND
UNITED STATES
Staff Report for the 2007 Article IV Consultation
Prepared by the Staff Representatives for the 2007 Consultation with the United States
Approved by Anoop Singh and Carlo Cottarelli
July 11, 2007
Scope and focus. Given the economic slowdown and concern about spillovers from the housing market and subprime delinquencies, a key topic of the discussions was prospects for a soft landing. Beyond this near-term issue, the focus was on improving financial sector regulation, resolving external imbalances, and achieving fiscal sustainability. Trade policy, aid, and anti-money-laundering initiatives were also covered (Table 1).
Outlook. The baseline anticipates moderate below-trend growth of 2 percent in 2007 and a pickup to 2¾ percent in 2008. However, housing market weakness, tighter credit conditions, and slower productivity growth could all hold back recovery.
Monetary policy. Current policy settings are consistent with a soft landing and core inflation of under 2 percent. However, tight labor markets and other inflation risks justify caution in lowering interest rates unless activity weakens rapidly.
Financial sector. Innovation under an “originate to distribute” business model has helped disperse risk and raise capital adequacy of core institutions. But with benign market conditions encouraging risk-taking, lending standards may be falling. Less fragmented and more principles- and risk-based supervision can raise resilience.
Current account. The large deficit has been easily financed, reflecting the attractiveness of U.S. financial markets. However, markets are not factoring in the significant depreciation likely associated with rebalancing demand and adjusting portfolios, and an abrupt dollar adjustment and financial market turbulence are risks for the global economy. Policies to encourage U.S. saving agreed at the Fund’s Multilateral Consultation could reduce this vulnerability, including through further fiscal adjustment.
Fiscal policy. Deficit reduction has exceeded expectations, but the main fiscal challenge is to address unsustainable increases in entitlement spending from rising medical costs and population aging. Reform of the Medicare, Medicaid, and Social Security programs should be complemented by improvements to the medical system, more ambitious medium-term consolidation, and an overhaul of the tax system.
Analytical work. Background studies analyze the size and sources of U.S. real spillovers, global bond market linkages, financing of the current account deficit, innovation in the financial system, evolution of the subprime mortgage market, recent buoyancy of federal revenues, and use of GFSM 2001 accounting standards (see Selected Issues).
Contents
I. Prospects for a Soft Landing
A. Overview
B. Financial Conditions and Developments
C. Housing and Household Spending
D. Prospects for Business Investment
E. Inflation Outlook
F. Funding the U.S. Current Account Deficit
II. Policy Discussions
A. Monetary Policy
B. Ensuring a Robust Financial System
C. External Imbalances and International Spillovers
D. Achieving Fiscal Sustainability
III. Staff Appraisal
Boxes
1. The Subprime Shakeout
2. Size and Sources of U.S. Spillovers Abroad
Tables
1. Long-Standing Fund Policy Advice
2. Policy Progress and Plans Relevant to the IMFC Strategy
3. Selected Economic Indicators
4. Economic Performance of Major Industrial Countries
5. Balance of Payments
6. Indicators of External and Financial Vulnerability
7. Fiscal Indicators
Figures
A. Financial Market Trends
B. Household Activity and Balance Sheets
C. Funding the Current Account
D. Monetary Policy Indicators
E. Financial Sector Soundness Indicators
F. International Spillovers
G. Entitlement Spending and the Long-term Fiscal Outlook
1. Financial Markets in an International Perspective
2. The Housing Market and Real Activity
3. The Housing Sector and Financial Markets
4. The Corporate Sector and the Real Economy
5. The Corporate Sector and Financial Markets
6. Trends in Inflation
7. Labor Market Indicators
8. External Developments
9. Indicators of International Competitiveness
10. Market Expectations of Exchange Rates
11. Financial Market Competitiveness
12. Fiscal Indicators
13. Health Care Indicators
14. Historical Trends in the Size of U.S. Government
Appendix Tables
1. Net Foreign Asset Position Sustainability Framework, 2002-2012
2. Public Sector Debt Sustainability Framework, 2002-20012
Appendix Figures
1. Net Foreign Asset Sustainability: Bound Tests
2. Public Debt Sustainability: Bound Tests
I. Fund Relations
II. Statistical Issues
Front Matter Page
Public Information Notice (PIN) No. 07/92
FOR IMMEDIATE RELEASE
August 1, 2007
International Monetary Fund
700 19th Street NW
Washington, D. C. 20431 USA
