Statement by the IMF Staff Representative July 27, 2007

This 2007 Article IV Consultation highlights that following an extended boom led by strong domestic demand, the slowdown in the United States has largely reflected a drag from residential investment as the housing market has weakened substantially. Unexpected weakness in business investment and net exports, as well as an inventory correction, amplified the downturn in early 2007, but growth is expected to recover in the remainder of the year. The most likely scenario is a soft landing of the U.S. economy, with growth picking up during 2007.

Abstract

This 2007 Article IV Consultation highlights that following an extended boom led by strong domestic demand, the slowdown in the United States has largely reflected a drag from residential investment as the housing market has weakened substantially. Unexpected weakness in business investment and net exports, as well as an inventory correction, amplified the downturn in early 2007, but growth is expected to recover in the remainder of the year. The most likely scenario is a soft landing of the U.S. economy, with growth picking up during 2007.

1. This note reports on information that has become available since the staff report was issued and does not alter the staff appraisal.

2. The Federal Reserve’s semi-annual Monetary Policy Report (MPR) was presented to Congress on July 18-19 by Chairman Bernanke. The Chairman cautioned that some of the recent easing in core inflation could be transitory, but expected this measure to fall below 2 percent on a sustainable basis by 2008. He also indicated that economic growth is likely to pick up modestly, from 2¼-2½ percent this year to 2½-2¾ percent in 2008 (both Q4 on Q4).

3. The Administration has released its Mid-Session Review of the budget. The projected FY 2007 deficit was marked down to 1½ percent of GDP, as anticipated in the Staff Report, but projected future deficits were raised modestly due to higher anticipated spending, mainly on Medicare/Medicaid. The changes are not large enough to warrant revisions to the data in the Staff Report.

4. Motivated by continued difficulties in the subprime mortgage market, regulators are taking steps to strengthen consumer protection in mortgage lending. On July 17, federal regulators announced a pilot project to cooperate with state regulators in checking compliance with consumer protection regulations by (1) non-depository affiliates of depository institutions and (2) by state-licensed mortgage lenders and brokers issuing subprime mortgages. This follows the issuance of final guidance requiring depository institutions to tighten lending standards to subprime adjustable rate mortgages. Federal regulators also announced on July 20 an agreed strategy on Basel II implementation. The agreement resolves major outstanding issues and should be followed by finalized rules relatively soon.

5. Recent data releases continue to point to easing inflation and moderate growth. Core CPI inflation fell to 2.2 percent in June. Consumption growth has slowed and the housing market remains weak. However, the data are more positive for other sectors: industrial production increased by 0.5 percent in June, and May export growth was strong. The flash second quarter GDP release is due the morning of the Board discussion.

6. While subprime mortgage spreads continue to widen, financial market conditions remain generally supportive of activity. Although high-yield corporate and investment bank credit spreads have widened, they remain at historically low levels. Meanwhile, U.S. equity markets have touched record highs.

United States: 2007 Article IV Consultation: Staff Report; Staff Statement; and Public Information Notice on the Executive Board Discussion
Author: International Monetary Fund