Public Information Notices

United States and the IMF

Free Email Notification

Receive emails when we post new items of interest to you.

Subscribe or Modify your profile




Public Information Notice (PIN) No. 04/77
July 30, 2004
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes 2004 Article IV Consultation with the United States

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2004 Article IV consultation with the United States is also available.

On July 23, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the United States.1

Background

Following a rather tepid recovery, the economy gathered strength in 2003. Supported by continued robust productivity growth, real GDP growth began to exceed the growth rate of potential output around mid-year. The recovery broadened in early 2004 as payroll employment strengthened, easing concerns that a lack of employment growth and correspondingly weaker household income could weigh on consumer demand. Both the pickup in economic activity and higher world energy prices have contributed to a rise in inflation that has helped erase earlier deflation fears. Although the pace of recovery appears to have slowed recently, partly owing to the dampening effect of higher oil prices on demand and the waning effects of earlier fiscal stimulus, prospects appear favorable for continued strength in the second half of the year.

Stronger asset prices have played an important role in supporting aggregate demand. Equity markets have risen nearly 50 percent from their lows just before the Iraq war, although prices have stagnated somewhat in recent months on concerns that the removal of monetary stimulus and higher energy costs would hurt corporate earnings. Nonetheless, house prices have continued to increase rapidly, and households have continued to refinance mortgage debt in order to reduce interest payments and lengthen debt maturities.

Both monetary and fiscal policies have provided significant support to the recovery, but stimulus is now being withdrawn. The Federal Reserve acted to raise the Federal funds rate by ¼ percentage point on June 30, long-term interest rates have risen by around 1 percentage point since late March, and part of the dollar's earlier depreciation has been reversed. On the fiscal front, the stimulus from this year's surge in personal tax refunds associated with the 2003 tax cuts is starting to fade, and investment incentives generated by accelerated depreciation allowances are slated to expire at end-December.

Labor productivity growth has remained remarkably strong during the past year, and job creation has also begun to revive. Tepid employment growth earlier in the recovery appeared to have largely reflected cost cutting in the face of uncertain growth and geopolitical uncertainties. With confidence firming, however, payrolls have expanded by 1¼ million in the first half of 2004 and the unemployment rate fell to 5.6 percent in the second quarter.

Strong productivity growth has also contributed to significant improvements in corporate and financial balance sheets. A sharp rebound in operating profits and relatively low levels of capital expenditure have helped elevate the share of after-tax profits in GDP to a post-war high. While this left the nonfinancial corporate sector in the unusual position of being a net provider of funds to the rest of the economy, firms have also taken advantage of low interest rates to extend the maturity of their debt. At the same time, the banking system booked record profits in 2004Q1 and near-record returns on assets.

Year-on-year core CPI inflation rose to almost 2 percent in June, after having fallen to a 40-year low of around 1 percent in early-2004. The rise reflects a deceleration of deflation in goods prices as the global recovery has increased costs of raw materials and intermediate inputs, but also some effect of the depreciation of the dollar. Nonetheless, rapid labor productivity growth continues to dampen unit labor costs, and service price inflation remains moderate. The pass-through from higher energy prices to non-energy prices has been limited, but higher fuel bills have lowered discretionary income, dampened aggregate demand, and weighed on the external trade balance.

Reflecting strong demand and higher import prices, the current account deficit has remained close to its record high of 5 percent of GDP. Although the dollar has rebounded somewhat in recent months, it remains some 10 percent in real effective terms below its peak in early 2002. The depreciation has been almost exclusively against industrial country currencies, while the dollar's position against major developing country partners has remained largely unchanged. The effect of the weaker exchange rate on real net exports, which continued to subtract from real GDP growth in 2003 and early 2004, has been modest, reflecting the usual lags between changes in real exchange rates and trade volumes as well as a relatively slow revival of foreign demand.

Fund staff projects output growth to remain above potential through 2004 and 2005, closing the output gap by 2006. The baseline forecast is predicated on continued strength in business fixed investment and an improvement in external demand. This is expected to help offset a slowdown in consumer demand, following the waning effect of recent tax cuts and a gradual rebound in the household saving rate, and weaker growth in government expenditure as the fiscal position is improved. Core inflation is expected to remain contained as the Federal Reserve is assumed to withdraw stimulus broadly in line with current market expectations. The current account position is anticipated to improve only modestly, with the deficit falling to close to 4 percent of GDP in 2009 as the lagged effects of dollar depreciation and economic recoveries in partner countries support net exports.

Executive Board Assessment

Executive Directors noted that the economy has shaken off an unprecedented series of adverse shocks and, with the support of significant monetary and fiscal stimulus that has been injected since the onset of the downturn, expanded strongly during the past year and is again providing valuable support to the global economy.

Directors observed that the short-term outlook for the U.S. economy remains relatively favorable, although subject to some uncertainty. While they acknowledged some downside risks—such as those related to high energy prices, the low household saving rate, and rapid recent increases in house prices—many viewed these as balanced by upside risks associated with rapid productivity growth that has kept price pressures at bay. Looking further ahead, however, most Directors stressed that continued robust growth of the economy will require decisive action to strengthen the U.S. fiscal position to avoid a crowding out of investment.

Against this background, Directors welcomed the emphasis that was placed on fiscal consolidation in the FY 2005 budget. With the recovery now well on track, most Directors agreed that the pace of deficit reduction projected in the budget over the coming two fiscal years is appropriate. They noted that sizeable budgetary pressures exist, and underscored the importance of ensuring that these pressures do not slow the pace of deficit reduction over this period. Indeed, most Directors also suggested that the likely better-than-expected budget outcome for the current fiscal year offers an opportunity to strengthen the near-term deficit-reduction objective.

Most Directors, however, questioned whether the Administration's medium-term fiscal objective—of halving the deficit in five years—is ambitious enough, especially given the increasing pressure on the Social Security and Medicare/Medicaid programs that is expected with the retirement of the baby boom generation. While acknowledging that entitlement reform holds the key to long-run fiscal sustainability, a number of Directors encouraged the authorities to aim toward bringing the budget back to balance, excluding Social Security, by the end of the decade, in order to provide greater fiscal room for placing entitlement programs on a sound financial footing. Directors also re-iterated their longstanding call for the establishment of a clear long-term fiscal goal, embedded in a credible medium-term fiscal framework, to anchor expectations and discipline policies.

Directors discussed the role of both expenditure discipline and revenue measures in ensuring longer-run fiscal sustainability. In this regard, they emphasized the helpful role that could be played by budget enforcement legislation, and cautioned against exempting tax cuts from the requirement that expansionary measures be accompanied by offsets to ensure budget neutrality. Indeed, given the magnitude of the fiscal adjustment considered necessary and the already-ambitious plans for cutting nondefense discretionary spending, most Directors felt that revenue enhancements should be actively considered. In this regard, it was noted that the focus might be on policies aimed at broadening and simplifying the tax base to help avoid unwinding recent cuts in marginal tax rates.

Directors recognized the need to address the severe underfunding of the Social Security and Medicare systems, noting that delaying reforms would only entail larger and more painful adjustments later. In this context, a number of Directors agreed that recent proposals to amend indexation formulas to slow the growth of Social Security benefits merit consideration, but several cautioned that diverting a portion of the payroll tax into private retirement accounts would significantly lower fiscal revenues and would have to be coupled with durable steps to ensure long-term fiscal sustainability. Directors observed that the underfunding of the Medicare system dwarfs that of Social Security, and has increased significantly as a result of the additional drug benefits introduced last year. Therefore, early steps to contain the growth of health care outlays are needed.

Directors observed that the Federal Open Market Committee (FOMC), after earlier providing essential support to the recovery and forestalling fears of deflation, has more recently appropriately prepared markets for the gradual withdrawal of monetary stimulus. Given signs that the recovery is maturing and labor market conditions are improving, and concerns that higher energy prices could revive inflation expectations, Directors supported the recent decision to start removing stimulus. Directors agreed that that there remains scope for a measured withdrawal of stimulus, with due regard for the pace of economic recovery, but—given the substantial gap between the current and neutral level of the federal funds rate and the usual transmission lags—Directors also welcomed recent statements by FOMC members that this process would not be unduly delayed.

Directors commended the Federal Reserve for its already high level of transparency, noting the effective manner in which the recent policy shift had been communicated to financial markets. A number of Directors suggested, however, that there could be merit in further anchoring market expectations by clarifying the Federal Reserve's definition of price stability and its medium-term inflation objective.

Directors reiterated their long-standing concern about the large U.S. current account deficit. While they acknowledged that the past two years had illustrated the market's ability to absorb a significant depreciation of the dollar, the current account deficit is expected to remain large, leaving the United States highly dependent upon private and official inflows from abroad. Directors noted that determined efforts to strengthen the U.S. fiscal position would help boost national saving, avoid an undue burden on investment—both domestically and abroad—and help achieve an orderly adjustment in resolving global current account imbalances. Directors also recognized that stronger growth abroad should play an important role in facilitating this adjustment.

Directors agreed that the banking sector has proven its resilience in recent years and that measures to strengthen corporate governance have helped increase confidence in market integrity. They observed that strong fundamentals have left the financial system well prepared for the withdrawal of monetary stimulus. Directors also commended the authorities for moving effectively in response to recent corporate failures. Directors agreed with the authorities' concerns about the large and increasing share of mortgage-backed securities held by the government sponsored enterprises (GSEs), and supported the Administration's efforts to strengthen supervision of these enterprises.

Directors recognized the important role of the United States in providing impetus to the Doha Round negotiations. They stressed that continued U.S. leadership and commitment to multilateral approaches to trade liberalization, especially with regard to agriculture, will be critical to the success of the Round. Directors welcomed recent increases in U.S. official development assistance (ODA) and progress achieved in implementing the Millennium Challenge Account. They noted, however, that U.S. ODA remains low as a share of Gross National Income and encouraged further increases in ODA in coming years.


United States: Selected Economic Indicators
(Annual change in percent, unless otherwise noted)


1997

1998

1999

2000

2001

2002

2003


 

 

 

 

 

 

 

 

NIPA in constant prices 1/

 

 

 

 

 

 

 

Real GDP

4.5

4.2

4.5

3.7

0.5

2.2

3.1

Net exports 2/

-0.3

-1.2

-1.0

-0.9

-0.2

-0.7

-0.4

Total domestic demand

4.8

5.3

5.3

4.4

0.7

2.8

3.3

Final domestic demand

4.3

5.3

5.4

4.5

1.6

2.4

3.4

Private final consumption

3.8

5.0

5.1

4.7

2.5

3.4

3.1

Public consumption expenditure

1.8

1.6

3.1

1.7

2.8

3.6

3.8

Gross fixed domestic investment

8.0

9.1

8.2

6.1

-2.3

-2.3

3.9

Private

9.2

10.2

8.3

6.5

-3.2

-3.7

4.4

Public

2.2

3.5

7.5

3.6

2.5

5.1

1.4

Change in business inventories 2/

0.5

0.0

-0.1

-0.1

-0.9

0.4

0.0

 

             

GDP in current prices 1/

6.2

5.3

6.0

5.9

2.9

3.8

4.8

               

Employment and inflation

             

Unemployment rate (percent)

4.9

4.5

4.2

4.0

4.8

5.8

6.0

CPI inflation

2.3

1.5

2.2

3.4

2.8

1.6

2.3

GDP deflator

1.7

1.1

1.4

2.2

2.4

1.5

1.7

 

 

 

 

 

 

 

 

Financial policy indicators

 

 

 

 

 

 

 

Unified federal balance (billions of dollars)

-22

69

126

236

127

-158

-375

In percent of CY GDP

-0.3

0.8

1.4

2.4

1.3

-1.5

-3.5

Central government balance (NIPA, billions of dollars)

-47

48

101

189

45

-259

-454

In percent of CY GDP

-0.6

0.5

1.1

1.9

0.4

-2.5

-4.1

General government balance (NIPA, billions of dollars)

-66

38

79

159

-16

-345

-538

In percent of CY GDP

-0.8

0.4

0.9

1.6

-0.2

-3.3

-4.9

Three-month Treasury bill rate

5.2

4.9

4.8

6.0

3.4

1.6

1.0

Ten-year government bond rate

6.4

5.3

5.6

6.0

5.0

4.6

4.0

 

 

 

 

 

 

 

 

Balance of payments

 

 

 

 

 

 

 

Current account balance (billions of dollars)

-136

-210

-297

-413

-386

-474

-531

In percent of GDP

-1.6

-2.4

-3.2

-4.2

-3.8

-4.5

-4.8

Merchandise trade balance (billions of dollars)

-198

-247

-346

-452

-427

-483

-548

In percent of GDP

-2.4

-2.8

-3.7

-4.6

-4.2

-4.6

-5.0

Export volume (NIPA, goods and services)

14.4

2.2

3.8

11.2

-6.1

-4.0

1.9

Import volume (NIPA, goods and services)

13.6

11.6

11.5

13.1

-3.2

3.7

4.8

Invisibles (billions of dollars)

62.1

37.1

49.2

39.0

41.5

9

17

In percent of GDP

0.7

0.4

0.5

0.4

0.4

0.1

0.2

 

 

 

 

 

 

 

 

Saving and investment (as a share of GDP)

 

 

 

 

 

 

 

Gross national saving

17.6

18.3

18.1

18.0

16.4

14.7

13.5

General government

1.9

3.1

3.7

4.4

2.7

-0.3

-1.9

Private

15.7

15.2

14.4

13.6

13.7

15.0

15.3

Personal

2.6

3.2

1.7

1.7

1.3

1.7

1.6

Business

13.1

12.0

12.7

11.9

12.4

13.2

13.7

Gross domestic investment

19.8

20.6

20.9

21.1

19.0

18.3

18.2

 

 

 

 

 

 

 

 


Source: Haver Analytics; and IMF staff estimates.

 

 

 

 

 

 

 

 

1/ National accounts data as available at the time of the July 23, 2004 Executive Board discussion.

2/ Contribution to growth.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.




IMF EXTERNAL RELATIONS DEPARTMENT

Public Affairs    Media Relations
E-mail: publicaffairs@imf.org E-mail: media@imf.org
Fax: 202-623-6278 Phone: 202-623-7100