Press Release No. 16/332

IMF Executive Board Concludes Article IV Consultation with United States

July 12, 2016

On July 8, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the United States. ¹

The U.S. is in its seventh consecutive year of expansion. The unemployment rate has fallen to 4.9 percent and household net worth is close to pre-crisis 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. On the upside, real household disposable income is growing at 3 percent, the housing market is growing at a healthy clip, and the current fiscal and monetary policy mix is supporting the economy.

With activity indicators for the second quarter of this year rebounding, the economy is expected to grow at 2.2 percent and 2.5 percent in 2016 and 2017, which is above potential. Over this period, the remaining labor market gap should close before growth begins to steadily decline to 2 percent over the medium term. Inflation has remained subdued and wage indicators on the whole have shown only modest acceleration. As the output gap closes, personal consumer expenditure (PCE) inflation is expected to slowly and moderately rise above 2 percent in 2017–19, before returning to the Federal Reserve’s medium-term target of 2 percent.

Risks to the growth outlook are tilted to the downside. Given uncertainty surrounding the implications of the U.K. referendum, continued financial market volatility or a further appreciation of the U.S. dollar are possible. There are, however, upside risks from oil—both in terms of a delayed effect on consumption and a lessening drag from oil-related investment. A more complex and harmful downside risk is the possibility that potential growth rate is lower than estimated and a smaller output gap than previously estimated. If true, this would mean the U.S. economy could soon bump up against capacity constraints that would slow growth and generate domestic inflationary pressures with negative global spillovers.

Over the longer term and despite the ongoing expansion, the U.S. faces a confluence of forces that may weigh on the prospects for continued gains in economic well being. A rising share of the US labor force is shifting into retirement, basic infrastructure is aging, productivity gains are scanty, and labor markets and businesses appear less adept at reallocating human and physical capital. These growing headwinds are overlaid by pernicious secular trends in income: labor’s share of income is around 5 percent lower today than it was 15 years ago, the middle class has shrunk to its smallest size in the last 30 years, the income and wealth distribution are increasingly polarized, and poverty has risen. 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 medium-term challenges of an increasingly polarized income distribution, high levels of poverty, falling labor force participation, and weak productivity growth, and policies to combat these trends.

Executive Board Assessment²

Executive Directors welcomed the continued recovery of the U.S. economy, on the back of strong fundamentals and supportive macroeconomic policies. Directors noted that, while the outlook remains broadly favorable, there are important downside risks and uncertainties, in particular slower potential growth, a strengthening of the U.S. dollar further away from levels justified by medium-term fundamentals, and sustained investor risk aversion following the outcome of the referendum in the United Kingdom. Meanwhile, longstanding issues on the supply side continue to weigh on economic prospects, including low productivity growth, falling labor force participation, and rising poverty and wealth inequality.

Directors agreed that the pace of interest rate normalization should remain data-dependent, proceeding cautiously along a gradual upward path. While there may be some merits in accepting a temporary overshooting of the medium-term inflation target until the economic expansion is solidly established, many Directors were concerned over the risks of de-anchoring inflation expectations and eroding monetary policy credibility. Directors welcomed the authorities’ commitment to monitor closely economic and financial developments, both domestic and global, and their implications for the Federal Reserve’s objectives of maximum employment and price stability. They also underscored the importance of maintaining clear, effective communication of the approach to interest rate adjustment.

Directors noted that near-term fiscal policy remains appropriately geared toward supporting growth and job creation. However, lasting institutional solutions are still needed to enhance the budget process and minimize fiscal uncertainties. Directors also highlighted the urgency of addressing the challenges posed by demographic trends, entitlement spending, and deteriorating infrastructure. In this context, they saw value in calibrating a credible medium-term consolidation plan to help guide the path of fiscal policy toward debt sustainability.

Directors stressed the need to take a broad range of measures to tackle longer-term challenges. Priorities include boosting federal infrastructure spending; further reforming the health care and pension systems; and reaching agreement on skill-based immigration reform. Directors called for concerted efforts to advance pro-poor policies, particularly expanding tax credits to low-income households, raising the federal minimum wage, and expanding paid-family leave and childcare assistance. Complementary measures to boost long-term growth include a comprehensive reform of the U.S. corporate income taxation, and further progress on trade integration.

Directors noted that recent regulatory reforms and improved capital positions have strengthened the U.S. banking system. Nevertheless, there remain pockets of vulnerabilities that warrant continued vigilance, particularly in the asset management and insurance industries, although at the current juncture risks are unlikely to be systemic. To preserve hard-won gains on financial stability, Directors called on the authorities to continue implementing the recommendations of the 2015 Financial Sector Assessment Program. It will be particularly important to complete the regulatory reforms under the Dodd-Frank Act. Directors also recommended close monitoring and placing the insurance sector under consolidated national regulation and supervision. They supported efforts to improve data collection and reporting in the nonbank sector, strengthen requirements on beneficial ownership, and maintain dialogue and support capacity building in countries affected by the withdrawal of correspondent banking relationships.

¹ 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.

² At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summaryistransmitted 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.