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United States and the IMF
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On August 3, the Executive Board concluded the Article IV consultation with United States1.
Real GDP grew by 3.7 percent during 1997, compared with 3.3 percent during 1996, reflecting sustained strength in private consumption and fixed investment. After rising at an annual rate of 5.5 percent in the first quarter of 1998, real GDP growth slowed to 1.4 percent in the second quarter. The sharp slowing of growth primarily reflected a marked slowdown in inventory accumulation, and net exports continued to be a significant drag on output growth reflecting the trade effects of the Asian crisis. The unemployment rate fell from almost 5½ percent in February 1997 to around 4¾ percent in the second half of 1997 and to about 4¼ percent in April and May 1998, before rising slightly to 4½ percent in June, which was still significantly below most estimates of the natural rate of unemployment. Despite tight labor markets, inflation remained subdued in 1997 with the core consumer price index (excluding food and energy prices) rising just 2¼ percent; during the first six months of 1998, core consumer prices rose at an annualized rate of just over 2½ percent.
Since the last increase in the federal funds rate in March 1997, monetary policy has been unchanged; however, monetary conditions tightened somewhat during 1997, reflecting the appreciation of the dollar. Given the uncertainties in the current economic environment and the lack of evidence of impending inflationary pressures, the FOMC has chosen to leave the stance of monetary policy unchanged.
The unified federal budget deficit declined steadily from $290 billion (4.7 percent of GDP) in FY 1992 to $22 billion (0.3 percent of GDP) in FY 1997, its lowest level since FY 1970. Although the strength of economic activity since the 1991–92 recession contributed to the decline in the fiscal deficit, most of the improvement is attributable to expenditure cuts and tax increases adopted in August 1993 as part of the Omnibus Budget Reconciliation Act of 1993 and subsequent actions. Developments in the current fiscal year continue to be favorable, and the federal budget is expected to be in surplus by about $60 billion (¾ percent of GDP) in FY 1998, the first budget surplus in 29 years.
On a real effective basis, the U.S. dollar appreciated by almost 8 percent from June to December 1997, and by over 13 percent for the year as a whole. This appreciation reflected relative cyclical conditions among major countries, as generally higher returns on dollar assets compared with those in other industrial economies continued to attract substantial capital inflows to the United States, and the Asian financial crisis. The dollar appreciated in real effective terms by about 5 percent in the first six months of 1998 to a level that was 35 percent higher than its low attained in April 1995. The U.S. external current account deficit rose from 1.8 percent of GDP in 1996 to 1.9 percent of GDP in 1997. Over the past two years, the merchandise trade deficit was relatively unchanged at around 2½ percent of GDP, but the balance on net investment income shifted from a small surplus to a small deficit. In the first quarter of 1998, the current account deficit rose to 2.3 percent of GDP (seasonally adjusted, annual rate), as merchandise exports declined and imports rose.
Executive Board Assessment
Executive Directors commended the authorities for their sustained implementation of sound macroeconomic policies, which, together with flexible labor markets, had set in train a virtuous cycle of strong growth and low inflation, and had established a firm foundation for sustaining the current economic expansion. While facilitated to some extent by temporary factors, in particular the effects of the Asian crisis on commodity prices, the remarkable performance of the economy owed fundamentally more to the authorities’ skillful economic management, according to Directors. Directors noted that the strength of the U.S. economy was facilitating adjustment in countries affected by the financial crisis in Asia and would help to continue to sustain growth in the world economy.
With the U.S. economy estimated to be operating at a very high level of resource utilization, Directors noted that a key to successful policy in the period immediately ahead was to gauge the underlying strength of the U.S. economy. In these circumstances, preventing the emergence of inflationary pressures would depend critically on aggregate demand growing at a rate more in line with the economy’s productive capacity. Directors believed that, despite the uncertainties associated with the effects of the Asian crisis, given recent inflation performance, the strong fiscal consolidation in recent years, and the prospects for a moderation in aggregate demand growth during 1998, the balance of risks suggested that the current stance of monetary policy was appropriate for the time being.
Directors cautioned, however, that other considerations warranted that the authorities remain vigilant in the period ahead. They noted that, in the absence of further adverse economic shocks from Asia and the rest of the world, labor market conditions were expected to remain tight in the United States, and the influence of factors that had restrained inflation was likely to wane. Directors also noted that asset prices and monetary and credit aggregates had posted strong gains recently. Under these circumstances, many Directors noted that a tightening of monetary policies could well be needed in the period ahead to safeguard hard-won gains against inflation and inflationary expectations, and to guard against a potential later major correction in equity markets and its adverse effects on the U.S. economy and financial markets abroad. Accordingly, they advocated an early monetary policy response should it become warranted.
Directors recognized that monetary tightening in the United States could have substantial effects on the currently sensitive global financial markets, which could in turn feed back to U.S. financial markets, and that such interlinkages complicated the formulation of U.S. monetary policy. While noting the importance of taking into account such interlinkages in policy formulation, Directors generally agreed that the United States could make the best contribution to the world economy by managing its monetary policy with a view to achieving price stability and maximum sustainable growth in the United States. A few Directors considered that if a further significant weakening of economic conditions in the rest of the world should dampen U.S. economic activity, a loosening of monetary policy could not be ruled out.
While a few Directors thought that the adoption of an inflation target would prove useful to anchor inflationary expectations at a time when the economy was close to full capacity and the choice between inflation and full employment could become more difficult, most others considered that the Federal Reserve’s policy framework had served the economy well and did not need to be changed. In the area of fiscal policy, Directors noted the rapid consolidation of the fiscal position over the last five years and the outlook for budget surpluses over the medium term. Directors strongly supported the authorities’ efforts to preserve the budget surpluses in prospect for the next few years. Those surpluses would give a needed boost to national saving and serve as a down payment toward resolving the longer-term financial problems of the Social Security and Medicare programs. Nevertheless, Directors cited the growing risk that fiscal restraint might give way to premature calls for net tax cuts and/or spending increases. Directors also pointed out that budget discipline was likely to come under additional pressure in the medium term as discretionary spending became increasingly compressed at a time when overall budget surpluses could be growing. They encouraged the authorities to resist such pressures.
Directors noted that the aging of the U.S. population would place increasing strains on Social Security and Medicare over the longer term. Prompt measures were needed to address longer-term imbalances in order to avoid large and potentially disruptive actions that would otherwise be needed in the future. Directors emphasized that efforts to address the financing needs of these programs should not rely solely on payroll tax increases. They considered that the problems of the two programs would be best addressed by small changes in their parameters (e.g., payroll taxes, benefit levels, and eligibility requirements). Several Directors also suggested that the Social Security and Medicare systems be separated from the rest of the budget so as to focus attention on these important areas and help insulate these systems from possible pressures to spend their surpluses.
Directors pointed out that the tax measures proposed by the Administration in its fiscal year 1998 budget continued the tendency to use tax incentives to promote specific economic or social objectives. Such incentives tended increasingly to complicate the income tax system and to undermine the simplification of the tax code achieved by the Tax Reform Act of 1986. Directors urged the authorities to consider measures to simplify the income tax system, reduce compliance costs, and reduce disincentives to saving, as well as to move to a more indirect tax system.
Directors noted that the appreciation of the U.S. dollar in late 1997 and in 1998 and the accompanying rise in the U.S. external current account deficit were having the salutary short-term effect of supporting external adjustment in the Asian economies hard hit by the financial crisis, while helping to ease demand pressures in the United States. As the economic situation in Asia stabilized, some Directors believed that some reversal of safe haven capital flows would contribute to a depreciation of the dollar, and that an additional real depreciation could be needed if large deficits in the U.S. external position were to persist over the medium term. Given the continued implementation of sound macroeconomic policies in the United States, those Directors agreed that this correction in the dollar’s value would be orderly. Any potential for this adjustment in the external balance to crowd out U.S. investment should be avoided by pursuing a longer-term fiscal policy objective that would raise national saving. Directors also noted that efforts by the United States’ major trading partners and in emerging markets to strengthen domestic demand would be needed for promoting an orderly decline in U.S. external imbalances.
Directors commended the U.S. authorities for their efforts to promote trade liberalization on terms supportive of the multilateral trading system, and emphasized the importance of the United States continuing to play a prominent role in this area. Directors urged the authorities to strongly resist any protectionist pressures that could arise as a result of the effects on trade flows of the financial crisis in Asia, and suggested that the use of unilateral trade sanctions risked becoming counterproductive. They also welcomed the authorities’ increased reliance on the World Trade Organization’s dispute settlement mechanism to resolve trade disputes. Some Directors pointed to the relatively high trade barriers that remain in certain sectors, including agriculture and textiles, and encouraged the U.S. authorities to lead by example in accelerating trade liberalization in those areas.
Directors expressed concern about the decline in U.S. official development assistance as a ratio to GDP, and strongly urged the authorities to restore the leadership role of the United States in this area by making every effort to raise those expenditures. This would help reverse a downward spiral in such assistance that appears to have developed on a worldwide basis. Directors also strongly encouraged the authorities to meet their commitments to international financial institutions, including support for the Enhanced Structural Adjustment Facility and the initiative for Heavily Indebted Poor Countries, especially in view of the strong economic position of the United States, as well as its important leadership role in the global economy.
|Table 1. United States: Selected Economic Indicators|
|(Annual percentage change, unless otherwise noted)|
|Economic activity and prices|
|Real net exports1||-0.0||0.2||-0.1||-0.1||-0.6||-0.5||0.1||-0.2||-0.3|
|Real final domestic demand||4.4||3.0||2.8||2.7||2.7||3.3||2.6||3.6||3.7|
|Nonresidential fixed investment||6.8||5.0||2.4||1.9||7.6||8.0||9.6||9.3||10.7|
|Total factor productivity2||1.9||1.1||0.0||1.7||0.2||0.3||-0.2||0.9||...|
|Implicit price deflator for GDP||2.3||6.7||5.0||2.7||2.6||2.4||2.3||1.9||1.9|
|Consumer price index||2.3||7.1||5.5||3.0||3.0||2.6||2.8||2.9||2.3|
|Unit labor cost2||2.1||6.4||4.6||1.9||2.2||1.4||2.4||1.9||2.1|
|Nominal effective exchange rate4||0.5||-2.5||-0.3||-2.0||3.0||-1.8||-6.0||5.3||8.1|
|Real effective exchange rate4||...||...||-0.3||-1.7||2.2||-1.4||-4.8||5.5||9.4|
|Ten-year Treasury note rate5 (%)||4.7||7.5||10.6||7.0||5.9||7.1||6.6||6.4||6.4|
|(In percent of GDP or NNP)|
|Balance of payments|
|Real net exports6||-1.2||-1.4||-1.6||-0.5||-1.1||-1.6||-1.4||-1.6||-1.9|
|Unified federal deficit||-0.8||-2.1||-4.0||-4.7||-3.9||-3.0||-2.3||-1.4||-0.3|
|Federal govt fiscal balance (NIPA)7||-0.2||-1.7||-3.5||-4.7||-3.9||-2.7||-2.3||-1.4||...|
|General govt fiscal balance (NIPA)7||-0.1||-1.0||-2.6||-4.4||-3.6||-2.3||-1.8||-0.8||...|
|Savings and investment8|
|Gross national saving||21.4||19.8||18.0||14.5||14.5||15.5||16.3||16.6||17.3|
|Of which: Federal government||2.2||-0.5||-2.1||-3.4||-2.8||-1.7||-1.4||-0.5||0.6|
|Gross domestic investment||20.6||20.2||19.8||16.0||16.5||17.5||17.4||17.8||18.4|
|Of which: Federal government||2.3||1.2||1.4||1.2||1.1||1.0||0.9||0.9||...|
|Net foreign investment||0.6||0.2||-1.6||-0.8||-1.2||-1.7||-1.4||-1.6||-1.7|
|Net national saving||12.5||9.9||6.7||3.4||3.8||4.9||6.0||6.5||7.4|
|Net private investment||8.7||9.0||7.4||3.7||4.8||6.0||6.0||6.5||7.4|
|In real terms|
|Gross domestic investment||17.5||17.0||17.4||16.0||16.7||17.7||17.7||18.5||19.5|
|Sources: U.S. Department of Commerce; U.S. Department of Labor; and Board of Governors of the Federal Reserve System.
1Contribution to GDP growth.
2Private nonfarm business sector.
4Monthly average on a ULC basis (1990=100).
6On a NIA basis.
7Current surplus or deficit excluding net investment.
8Gross national saving does not equal gross domestic investment and net foreign investment because of capital grants and the statistical discrepancy.
1Under 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 Managing Director, as Chairman of the Board, summarizes the views of directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.
IMF EXTERNAL RELATIONS DEPARTMENT