The FINANCIAL — On July 24, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the United States.
The United States is in the longest expansion since 1850. The unemployment rate has fallen to 4.4 percent and job growth continues to be strong. The economy has gone through a temporary growth dip in the early part of this year but momentum has picked up and the economy is expected to grow at 2.1 percent this year and next, modestly above potential, supported by solid consumption growth and a rebound in investment, according to IMF.
Labor market indicators suggest that the economy could be effectively at full employment. Inflation has remained subdued and, indeed, has weakened moderately in recent months. Wage indicators have shown a modest acceleration. Over the next 12–18 months personal consumer expenditure (PCE) inflation is expected to slowly rise above 2 percent, before returning to the Federal Reserve’s medium-term target of 2 percent.
There are two-sided risks to the growth outlook. A medium-term path of fiscal consolidation, such as the expenditure based consolidation proposed in the budget, would address medium-term fiscal imbalances but result in a growth rate that is below staff’s baseline. On the upside, spending reductions could be less ambitious and tax reforms could lower federal revenues, providing stimulus to the economy and raising near-term growth.
Over the longer term and despite the ongoing expansion, the United States faces a confluence of forces that may weigh on the prospects for continued gains in economic wellbeing. Secular structural shifts are occurring on multiple fronts including technological change that is reshaping the labor market, low productivity growth, rising skills premia, and an aging population. If left unchecked, these forces will continue to drag down both potential and actual growth, diminish gains in living standards, and worsen poverty.
The consultation focused on the policies needed to raise productivity and labor force participation, reduce poverty and income polarization, and help restore the economy’s adaptability and dynamism.
Executive Board Assessment
Executive Directors agreed with the thrust of the staff appraisal. They commended the strong performance of the U.S. economy, including a rebound in growth, improved consumer confidence, low unemployment, and steady job increases. At the same time, they noted that the favorable near‑term outlook is clouded by important medium‑term challenges, including rising public debt, potential growth below historical averages, declining labor force participation, and income growth that is not broadly shared. Against this background, Directors welcomed the authorities’ goal to raise productivity and competitiveness, and underscored the importance of further clarity regarding the authorities’ policy plans.
Directors noted that the economy is close to full employment and inflation is near the Federal Reserve’s price stability mandate of 2 percent. They agreed that policy rates should continue to rise gradually, and the increases should continue to be data‑dependent. Directors noted that well‑communicated plans for unwinding the Federal Reserve’s holdings of securities have been important in ensuring a smooth normalization of U.S. monetary policy, and welcomed the recent addendum to the policy normalization principles and plans. In this context, Directors highlighted the need to be mindful of potential global spillovers as normalization proceeds.
Directors agreed that addressing the medium‑term challenges will require measures on various fronts. Reforms should include building a more efficient tax system; establishing a more effective regulatory system; raising infrastructure spending; improving education and developing skills; strengthening healthcare coverage while containing costs; offering family‑friendly benefits; maintaining a free, fair, and mutually beneficial trade and investment regime; and reforming the immigration and welfare systems. Directors noted that the authorities’ objectives are broadly aligned with these priorities.
Directors considered that such a reform package could raise productivity, labor supply, and investment, and ultimately improve living standards. While such a plan requires changes in fiscal spending and revenue priorities, measures need to be subsumed under a gradual but steady fiscal consolidation path, in view of elevated public debt and deficit levels, and public spending pressures from population aging and rising interest rates. Many Directors urged the authorities to ensure that tax reform leads to an increase in the revenue‑to‑GDP ratio and that the burden of fiscal adjustment does not fall disproportionately on low‑ and middle‑income households.
Directors observed that the financial system is generally healthy. They urged the authorities to monitor closely the rising vulnerabilities in corporate and household credit markets, and implement the remaining recommendations of the 2015 Financial Sector Assessment Program. Directors noted that important gains have been made since the global financial crisis in strengthening the financial oversight structure. They concurred that some aspects of the system can be finetuned and the regulatory structure simplified, as has been proposed by the authorities. Directors emphasized, however, that the thrust of the current risk‑based approach to regulation, supervision, and resolution should be preserved to safeguard financial stability while facilitating economic growth. In this connection, they welcomed the authorities’ commitment to maintain a leading role in financial regulatory discussions in international forums.