Statement by the IMF Staff Representative on the United States, July 8, 2016

This 2016 Article IV Consultation highlights that the United States is now in its seventh consecutive year of expansion. The unemployment rate has fallen to 4.9 percent, and household net worth is close to precrisis peaks. Nonetheless, the economy has gone through a temporary growth dip in the last two quarters. Lower oil prices led to a further contraction in energy sector investment, and a strong dollar and weak global demand have weighed on net exports. With activity indicators for the second quarter of 2016 rebounding, the economy is expected to grow at 2.2 percent and 2.5 percent in 2016 and 2017, which is above potential.

Abstract

This 2016 Article IV Consultation highlights that the United States is now in its seventh consecutive year of expansion. The unemployment rate has fallen to 4.9 percent, and household net worth is close to precrisis peaks. Nonetheless, the economy has gone through a temporary growth dip in the last two quarters. Lower oil prices led to a further contraction in energy sector investment, and a strong dollar and weak global demand have weighed on net exports. With activity indicators for the second quarter of 2016 rebounding, the economy is expected to grow at 2.2 percent and 2.5 percent in 2016 and 2017, which is above potential.

1. This statement reports on information that has become available since the staff report was issued. It does not alter the thrust of the staff appraisal.

2. Better activity data for the first two quarters of the year. Growth in the first quarter was revised up from 0.8 to 1.1 percent due to stronger net exports and non-residential investment. The revised estimate is broadly in line with staff’s expectation based on high frequency activity indicator models. Real private consumption expenditure (PCE) for April and May grew by 0.8 and 0.3 percent m/m, respectively. The strong spending momentum and upward revision to first quarter growth strengthen the basis for staff’s growth forecast of 2.2 percent in 2016.

3. Uncertainty surrounding the implications of the U.K. referendum. U.S. markets reacted negatively to the result of the U.K. referendum. After a sell-off in risk assets in the first two days, U.S. stock markets have recovered and the U.S. dollar, in nominal effective terms, has appreciated by less than 1 percent. Long-term treasury yields have fallen substantially to 1.4 percent on 10-year bonds, driven by safe haven flows and expectations of a slower pace of future policy rate increases. Continued bouts of financial market volatility or a further appreciation of the U.S. dollar are possible. The team expects the impact on the baseline to be small but because of uncertainty about the economic fallout, risks to the outlook appear now as skewed to the downside. Should downside risks materialize, interest rate increases should be delayed in line with a data dependent approach. Near-term fiscal spending could be increased in the event that growth decelerates substantially.

4. On June 30, the President signed a bill to provide a framework to restructure Puerto Rico’s debt. The Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”) puts in place an oversight board for the Commonwealth, imposes a stay on creditor action, and establishes a collective action mechanism for restructuring existing bonds. The collective action mechanism allows creditors holding over two-thirds of the outstanding principal of the bonds within a pool to bind the minority. In the event a voluntary restructuring agreements cannot be reached, the law provides for a U.S. court-supervised restructuring process (replicating a number of the provisions of the Federal Bankruptcy Code). After passage of the law, Puerto Rico defaulted on US$1.9 billion of debt obligations.

5. The Federal Reserve published results of its 2016 Comprehensive Capital Assessment Program (CCAR). Owing mainly to strengthened capital buffers, all 33 participating bank holding companies passed the supervisory stress test, which was based on stringent scenarios including a long recession and negative yields on U.S. Treasuries. However, the Federal Reserve objected to the capital plans of U.S. subsidiaries of Deutsche Bank and Banco Santander on the basis of qualitative factors related to capital planning.

United States: 2016 Article IV Consultation-Press Release; and Staff Report
Author: International Monetary Fund. Western Hemisphere Dept.