Abstract
The U.S. economy is recovering from a financial crisis, but remains vulnerable to shocks. Executive Directors welcomed health care reform, fiscal stabilization, and the Financial Sector Assessment Program (FSAP) assessment, which acknowledged that the financial system has strengthened. Directors underscored the risks in the over-the-counter (OTC) derivatives markets, revitalizing private securitization, and reforms to the housing finance system, including government-sponsored enterprises (GSEs). Directors appreciated the United States for promoting multilateral economic management. Directors assessed that U.S. economic policy could help secure global growth and stability through fiscal consolidation, which could reduce account deficit, and strengthen the financial sector.
On July 26, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the United States.1
Background
Thanks to a massive policy response, the U.S. economy is recovering from the worst financial crisis since the Great Depression. Monetary policy has maintained a highly accommodative tilt, with policy rates near zero and asset purchases that have helped to ameliorate financial strains. Fiscal policy has been very stimulative, with the American Recovery and Reinvestment Act imparting stimulus of about 5 percent of GDP during 2009- 2011, supplemented by measures targeted to housing, labor and auto markets. Meanwhile, measures to stabilize financial markets, capital injections, guarantees, and stress testing dramatically improved financial conditions. As a result, GDP grew an average 4 percent (seasonally adjusted annual rate) in the second half of 2009 before slowing to 2.7 percent (saar) growth in the first quarter of 2010. The U.S. current account deficit shrank on the back of weak domestic demand, lower oil prices, and the cumulative effect of the depreciation trend in the dollar since early 2002.
However, the economic recovery has been slow by historical standards—consistent with past experience in the aftermath of housing and financial crises—and the outlook remains uncertain. In particular, private demand has been sluggish, while the unemployment rate has receded only modestly from near post-Depression highs. As a result, inflation has remained contained, with core inflation easing amid wide economic slack. Recent market volatility from the sovereign crisis in Europe has tightened financial conditions somewhat despite safe-haven flows that have reduced Treasury yields. Looking ahead, risks are elevated and tilted to the downside (as clear from the most recent batch of economic indicators), with particular risks from a double dip in the housing market and spillovers if external financial conditions worsen.
Macroeconomic policies are set to remain accommodative in the near term. The draft FY2011 budget includes allowances for further targeted support for growth, while proposing measures aimed at reducing the deficit to 4 percent of GDP by the middle of the decade. A new Fiscal Commission will recommend measures aimed at further reducing the deficit to roughly 3 percent of GDP and stabilizing the ratio of debt to GDP over the medium term. Most of the special liquidity facilities have been phased out and the Fed ended its mortgage-backed securities purchase program without disrupting markets, while signaling continued low policy rates for an extended period.
Progress has been made in addressing long-term challenges. The health care reform widens coverage and introduces cost-containment measures, and seeks to reduce near-term deficits as well as the long-term fiscal gap. The financial regulation reform, which is broadly consistent with proposals in the IMF’s Financial Stability Assessment Program, includes a broadening of the regulatory perimeter to all systemic institutions and markets, a new council of regulators to improve systemic risk detection and resolution, tighter prudential regulation parameters, and stronger resolution mechanisms for nonbank financial institutions.
Executive Board Assessment
Executive Directors noted the economic recovery underway in the United States, aided by a massive policy response. However, with recovery still dependent on policy support, rising downside risks, and substantial long-term fiscal and financial-sector challenges, further decisive action is needed to achieve stable medium-term growth and limit risks of adverse international spillovers.
Directors saw near-term tradeoffs between supporting recovery and addressing long-term legacies. Macroeconomic support remains appropriate for this year, given still-weak demand, high unemployment, and lingering financial strains, although the envisioned withdrawal in 2011 is appropriate. Monetary support can be sustained for longer, given quiescent inflation expectations and forthcoming fiscal drag. However, Directors saw scope for a smaller up-front fiscal adjustment if downside risks materialize, complemented by measures to bolster medium-term credibility.
Setting public debt on a sustainable path is a key macroeconomic challenge. Directors welcomed the authorities’ commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP under staff’s economic assumptions, requiring revenue and expenditure measures. They urged the authorities to accompany the 2011 adjustment with a strong commitment to medium-term stabilization, perhaps including further entitlement reform. Some Directors welcomed the creation of the Fiscal Commission and the Independent Payment Advisory Board as useful steps. A number of Directors encouraged the authorities to set debt-to-GDP on a declining path in the longer term.
Directors welcomed the health care reform, including enhanced coverage and measures to control costs, the key long-term fiscal risk. However, with payoffs highly uncertain, close monitoring of costs and remedial actions, if needed, will be essential. Further action is also necessary on Social Security, where needed measures are well known and payoff more certain.
Directors welcomed the FSAP assessment, which acknowledged that the financial system has strengthened but remains vulnerable to shocks. Private securitization is still impaired and banks may lack balance-sheet strength to support future credit demand. Accordingly, banks must fully recognize balance-sheet risks and have sufficient capital to support recovery.
Directors welcomed the major financial reform, which is broadly consistent with FSAP recommendations, but noted that strong implementation will be crucial. Close coordination among regulatory agencies is essential, as the reform missed the opportunity to consolidate the complex array of regulators. Directors also underscored the importance of containing counterparty risks in OTC derivatives markets; revitalizing private securitization; and moving ahead with reforms to the housing finance system, including the GSEs.
Directors saw the Federal Reserve as well placed to manage the monetary exit given its expanded toolkit. The Fed has credibly communicated its commitment to sustaining accommodative monetary conditions while preparing for the exit. Continued clear communication is essential as the exit evolves.
Directors saw a key role for the United States in promoting multilateral economic management. U.S. economic policy could help secure medium-term global growth and stability mainly through medium-term fiscal consolidation, which could also help reduce the current account deficit, and strengthening the financial sector. On trade policy, Directors welcomed the authorities’ limited recourse to protectionist measures and encouraged them to redouble efforts to conclude the Doha round.
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 staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2010 Article IV Consultation with United States is also available.
United States: Selected Economic Indicators
(annual change in percent, unless otherwise indicated)
Contribution to real GDP growth, percentage points.
United States: Selected Economic Indicators
(annual change in percent, unless otherwise indicated)
| Projections | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | |||||||
| National production and income | |||||||||||||
| Real GDP | 3.1 | 2.7 | 2.1 | 0.4 | -2.4 | 3.3 | 2.9 | ||||||
| Net exports 1/ | -0.3 | -0.1 | 0.6 | 1.2 | 1.2 | -0.3 | -0.5 | ||||||
| Total domestic demand | 3.2 | 2.6 | 1.4 | -0.7 | -3.4 | 3.5 | 3.3 | ||||||
| Final domestic demand | 3.3 | 2.5 | 1.7 | -0.4 | -2.7 | 2.1 | 3.0 | ||||||
| Private final consumption | 3.4 | 2.9 | 2.7 | -0.2 | -0.6 | 2.3 | 2.1 | ||||||
| Public consumption expenditure | 0.6 | 1.0 | 1.4 | 3.0 | 1.8 | 0.8 | -2.0 | ||||||
| Gross fixed domestic investment | 5.3 | 2.5 | -1.2 | -3.6 | -14.5 | 2.8 | 12.3 | ||||||
| Private fixed investment | 6.5 | 2.3 | -2.1 | -5.1 | -18.3 | 3.1 | 15.0 | ||||||
| Residential structures | 6.2 | -7.3 | -18.5 | -22.9 | -20.5 | 0.7 | 19.9 | ||||||
| Public fixed investment | -0.8 | 3.3 | 3.2 | 3.4 | 1.9 | 1.7 | 3.0 | ||||||
| Change in private inventories 1/ | -0.1 | 0.1 | -0.3 | -0.4 | -0.9 | 1.3 | 0.3 | ||||||
| GDP in current prices | 6.5 | 6.0 | 5.1 | 2.6 | -1.3 | 4.1 | 4.1 | ||||||
| Employment and inflation | |||||||||||||
| Unemployment rate | 5.1 | 4.6 | 4.6 | 5.8 | 9.3 | 9.7 | 9.2 | ||||||
| CPI inflation | 3.4 | 3.2 | 2.9 | 3.8 | -0.3 | 1.6 | 1.1 | ||||||
| GDP deflator | 3.3 | 3.3 | 2.9 | 2.1 | 1.2 | 0.8 | 1.2 | ||||||
| Government finances | |||||||||||||
| Federal government (budget, fiscal years) | |||||||||||||
| Federal balance (percent of GDP) | -2.6 | -1.9 | -1.2 | -3.2 | -11.3 | -11.0 | -8.1 | ||||||
| Debt held by the public (percent of GDP) | 36.9 | 36.5 | 36.2 | 40.2 | 53.0 | 64.0 | 69.0 | ||||||
| General government (GFSM 2001, calendar years) | |||||||||||||
| Net lending (percent of GDP) | -3.2 | -2.0 | -2.7 | -6.6 | -12.5 | -10.7 | -8.0 | ||||||
| Structural balance | |||||||||||||
| (percent of potential nominal GDP) | -2.3 | -1.9 | -2.3 | -4.7 | -7.1 | -8.0 | -6.2 | ||||||
| Gross debt (percent of GDP) | 61.6 | 61.1 | 62.1 | 70.6 | 83.2 | 92.1 | 97.2 | ||||||
| Interest rates (percent) | |||||||||||||
| Three-month Treasury bill rate | 3.2 | 4.8 | 4.5 | 1.4 | 0.2 | 0.1 | 0.3 | ||||||
| Ten-year government bond rate | 4.3 | 4.8 | 4.6 | 3.7 | 3.3 | 3.6 | 4.7 | ||||||
| Balance of payments | |||||||||||||
| Current account balance (billions of dollars) | -748 | -803 | -718 | -669 | -378 | -482 | -531 | ||||||
| Percent of GDP | -5.9 | -6.0 | -5.1 | -4.6 | -2.7 | -3.2 | -3.4 | ||||||
| Merchandise trade balance (billions of dollars) | -784 | -839 | -823 | -835 | -507 | -651 | -735 | ||||||
| Percent of GDP | -6.2 | -6.3 | -5.8 | -5.8 | -3.6 | -4.4 | -4.8 | ||||||
| Balance on invisibles (billions of dollars) | 36 | 37 | 105 | 166 | 129 | 168 | 204 | ||||||
| Percent of GDP | 0.3 | 0.3 | 0.7 | 1.1 | 0.9 | 1.1 | 1.3 | ||||||
| Saving and investment (percent of GDP) | |||||||||||||
| Gross national saving | 15.1 | 16.2 | 14.5 | 12.6 | 10.8 | 12.5 | 14.2 | ||||||
| Gross domestic investment | 20.3 | 20.5 | 19.5 | 18.2 | 15.0 | 16.0 | 17.6 | ||||||
Contribution to real GDP growth, percentage points.
United States: Selected Economic Indicators
(annual change in percent, unless otherwise indicated)
| Projections | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | |||||||
| National production and income | |||||||||||||
| Real GDP | 3.1 | 2.7 | 2.1 | 0.4 | -2.4 | 3.3 | 2.9 | ||||||
| Net exports 1/ | -0.3 | -0.1 | 0.6 | 1.2 | 1.2 | -0.3 | -0.5 | ||||||
| Total domestic demand | 3.2 | 2.6 | 1.4 | -0.7 | -3.4 | 3.5 | 3.3 | ||||||
| Final domestic demand | 3.3 | 2.5 | 1.7 | -0.4 | -2.7 | 2.1 | 3.0 | ||||||
| Private final consumption | 3.4 | 2.9 | 2.7 | -0.2 | -0.6 | 2.3 | 2.1 | ||||||
| Public consumption expenditure | 0.6 | 1.0 | 1.4 | 3.0 | 1.8 | 0.8 | -2.0 | ||||||
| Gross fixed domestic investment | 5.3 | 2.5 | -1.2 | -3.6 | -14.5 | 2.8 | 12.3 | ||||||
| Private fixed investment | 6.5 | 2.3 | -2.1 | -5.1 | -18.3 | 3.1 | 15.0 | ||||||
| Residential structures | 6.2 | -7.3 | -18.5 | -22.9 | -20.5 | 0.7 | 19.9 | ||||||
| Public fixed investment | -0.8 | 3.3 | 3.2 | 3.4 | 1.9 | 1.7 | 3.0 | ||||||
| Change in private inventories 1/ | -0.1 | 0.1 | -0.3 | -0.4 | -0.9 | 1.3 | 0.3 | ||||||
| GDP in current prices | 6.5 | 6.0 | 5.1 | 2.6 | -1.3 | 4.1 | 4.1 | ||||||
| Employment and inflation | |||||||||||||
| Unemployment rate | 5.1 | 4.6 | 4.6 | 5.8 | 9.3 | 9.7 | 9.2 | ||||||
| CPI inflation | 3.4 | 3.2 | 2.9 | 3.8 | -0.3 | 1.6 | 1.1 | ||||||
| GDP deflator | 3.3 | 3.3 | 2.9 | 2.1 | 1.2 | 0.8 | 1.2 | ||||||
| Government finances | |||||||||||||
| Federal government (budget, fiscal years) | |||||||||||||
| Federal balance (percent of GDP) | -2.6 | -1.9 | -1.2 | -3.2 | -11.3 | -11.0 | -8.1 | ||||||
| Debt held by the public (percent of GDP) | 36.9 | 36.5 | 36.2 | 40.2 | 53.0 | 64.0 | 69.0 | ||||||
| General government (GFSM 2001, calendar years) | |||||||||||||
| Net lending (percent of GDP) | -3.2 | -2.0 | -2.7 | -6.6 | -12.5 | -10.7 | -8.0 | ||||||
| Structural balance | |||||||||||||
| (percent of potential nominal GDP) | -2.3 | -1.9 | -2.3 | -4.7 | -7.1 | -8.0 | -6.2 | ||||||
| Gross debt (percent of GDP) | 61.6 | 61.1 | 62.1 | 70.6 | 83.2 | 92.1 | 97.2 | ||||||
| Interest rates (percent) | |||||||||||||
| Three-month Treasury bill rate | 3.2 | 4.8 | 4.5 | 1.4 | 0.2 | 0.1 | 0.3 | ||||||
| Ten-year government bond rate | 4.3 | 4.8 | 4.6 | 3.7 | 3.3 | 3.6 | 4.7 | ||||||
| Balance of payments | |||||||||||||
| Current account balance (billions of dollars) | -748 | -803 | -718 | -669 | -378 | -482 | -531 | ||||||
| Percent of GDP | -5.9 | -6.0 | -5.1 | -4.6 | -2.7 | -3.2 | -3.4 | ||||||
| Merchandise trade balance (billions of dollars) | -784 | -839 | -823 | -835 | -507 | -651 | -735 | ||||||
| Percent of GDP | -6.2 | -6.3 | -5.8 | -5.8 | -3.6 | -4.4 | -4.8 | ||||||
| Balance on invisibles (billions of dollars) | 36 | 37 | 105 | 166 | 129 | 168 | 204 | ||||||
| Percent of GDP | 0.3 | 0.3 | 0.7 | 1.1 | 0.9 | 1.1 | 1.3 | ||||||
| Saving and investment (percent of GDP) | |||||||||||||
| Gross national saving | 15.1 | 16.2 | 14.5 | 12.6 | 10.8 | 12.5 | 14.2 | ||||||
| Gross domestic investment | 20.3 | 20.5 | 19.5 | 18.2 | 15.0 | 16.0 | 17.6 | ||||||
Contribution to real GDP growth, percentage points.
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.