Statement by the IMF Staff Representative on the United States July 30, 2012

The slow-paced growth rate of the U.S. economy, notwithstanding the bolstering attempts is disheartening. Implementing financial reforms and highly accommodative monetary policy are hoped to have a desired effect. Deficit reduction, debt ratio stabilizing strategies, removal of fiscal cliff uncertainties, effective implementation of housing, and labor market holstering policies need immediate attention in the Executive Board’s view. Underscoring the effect on global economy growth and stability, Directors commended U.S. efforts in fostering international coordination on financial regulatory reforms and in securing successful multilateral trade negotiations.

Abstract

The slow-paced growth rate of the U.S. economy, notwithstanding the bolstering attempts is disheartening. Implementing financial reforms and highly accommodative monetary policy are hoped to have a desired effect. Deficit reduction, debt ratio stabilizing strategies, removal of fiscal cliff uncertainties, effective implementation of housing, and labor market holstering policies need immediate attention in the Executive Board’s view. Underscoring the effect on global economy growth and stability, Directors commended U.S. efforts in fostering international coordination on financial regulatory reforms and in securing successful multilateral trade negotiations.

1. This note reports on information that has become available since the staff report (SM/12/192) was issued and does not alter the thrust of the staff appraisal.

2. Data released since the completion of the Article IV consultation in early July point to a slowdown in near-term growth. Annualized real GDP growth is estimated at 1.5 percent for the second quarter, marginally lower than staff’s projection of 1.7 percent and lower than the 2 percent growth estimated for the first quarter. The deceleration was largely due to a slowdown in private consumption growth, likely reflecting the run up in gasoline prices through April, and slower job creation and lower income expectations in the face of growing uncertainty. The national accounts revisions released on July 27th indicate that growth was lower in 2010 and higher in 2011 than previously thought.

3. On July 18, 2012, the Financial Stability Oversight Council (FSOC) designated eight financial market utilities as systemically important, subjecting them to Fed supervision and heightened prudential standards. The designated utilities perform a variety of functions, including the clearing and settlement of cash, securities, and derivatives transactions. On the same date, the FSOC published its second annual report, followed by the issuance of the inaugural annual report of the U.S. Treasury’s Office of Financial Research on July 20th. The potential threats to U.S. financial stability identified in these reports are largely in line with those highlighted in the Staff Report.

4. Financial conditions do not appear to have changed noticeably since the end of the consultation, despite intensified financial stresses in the euro area. Second-quarter earnings for major U.S. financial institutions were mostly above expectations, mainly as lower provisioning expenses offset the negative impact of lower trading profits, sluggish loan growth, and low interest rates. The pick-up in mortgage refinancing activity under the Home Affordable Refinancing Program has also boosted revenues. CDS spreads on major U.S. banks and equity prices for financial institutions remain around their end-June levels.

5. Two notable analytical reports have been published on the fiscal policy front. First, the Congressional Budget Office and the Joint Committee on Taxation have examined implications of the recent Supreme Court ruling on health care reform. Since the ruling has effectively allowed states to choose whether to expand eligibility for coverage under their Medicaid program, it is projected that about 3 million more people than initially estimated will remain uninsured once the reform is implemented, implying lower federal government spending (around $84 billion over a decade). Second, a task force headed by Richard Ravitch and Paul Volcker highlighted well-known problems with state and local budgets, such as unfunded pension and health care liabilities and lack of transparency in accounting practices. Many of the task force recommendations are in line with those of staff—as described, for example, in the Selected Issues Paper “Fiscal Challenges Facing the U.S. State and Local Governments” (IMF Country Report No. 11/202).