## _cr10249 - EXECUTIVE SUMMARY

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---

### Context
- Recovery driven by unprecedented macroeconomic policy stimulus, emergency financial stabilization measures, and a gathering cyclical upswing.
- Expansion subdued by balance-sheet headwinds in the financial and household sectors.
- Risks tilted to the downside, notably spillovers associated with sovereign strains in Europe.

### Assessment
- Authorities should cautiously complete the exit from extraordinary policy support and decisively address long-term legacies: fiscal imbalances and FSAP-identified gaps in financial regulation, to secure stable medium-term growth, limit adverse international spillovers, and contain risks of new financial excesses.
- Authorities are more optimistic than staff on the outlook and see a smaller required medium-term fiscal adjustment, but broadly agree on the challenges.
- Fiscal stabilization and strong implementation of financial reforms are priorities.

### Policy recommendations
- Macroeconomic stimulus
  - Maintain stimulus in 2010 while the recovery is still gaining traction.
  - In 2011, make the planned down-payment on fiscal consolidation (with flexibility on the size of adjustment if risks materialize).
  - Balance-sheet headwinds and tail risks (including deflation) call for a cautious monetary exit.
- Fiscal stabilization
  - Develop a credible plan for stabilizing debt/GDP over the medium term, entailing a larger adjustment than under authorities’ budget path, without jeopardizing the recovery.
  - A credible plan would include: an upfront adjustment (the planned adjustment in 2011 would be appropriate under staff’s baseline outlook), clear commitment to future measures (perhaps by enshrining targets in legislation), and further entitlement reforms—tradeoffs among them are possible in downside scenarios.
  - Over the long term, aim to put the debt ratio on a downward path.
- Financial reform
  - Banks remain vulnerable and will need additional capital to lend when credit demand recovers.
  - Tighten regulation to lower systemic risks (robust consolidated supervision, stricter standards on systemic institutions to discourage systemic size and complexity, improved resolution mechanism).
  - Promptly implement steps to revitalize securitization and bring a macro-prudential focus to the council of regulators.

### Key near-term findings and indicators
- Cumulative GDP growth: 1.9 percent (unannualized) over the second half of 2009; peak-to-trough decline of 3.7 percent.
- First quarter 2010 GDP: rose 0.7 percent (unannualized; 2.7 percent, annualized).
- Federal Reserve target rate: all-time low of 0–25 basis points.
- American Recovery and Reinvestment Act of 2009: about 5 percent of one year’s GDP during 2009–11.
- Stimulus contribution: added over 1 percent to growth in 2009; smaller effect expected in 2010; negative contributions starting in 2011.
- Inventories: subtracted 3¾ percent (seasonally adjusted at an annual rate) from GDP growth in H1 2009; contributed 3¾ percentage points to growth in Q4 2009 and 1½ percentage points in Q1 2010.

### Financial sector and balance-sheet headwinds
- Policy response stabilized financial conditions via capital injections, emergency lending, stress tests, and guarantees.
- Financial conditions remain dependent on policy support and tight for:
  - Small and medium-sized enterprises reliant on financing from smaller banks (hit hard by commercial real estate losses).
  - Segments dependent on the still-weak private securitization markets.
- Systemic institutions: increased capital and improved quality, but:
  - High provisioning expenses weigh on profitability.
  - System-wide loan losses appear to be peaking, yet reserves are low by historical standards.
  - High delinquencies and substantial exposure in real estate are key risks.
  - Banks are keeping lending standards high and demand for loans is weak.

### Exit strategy and sequencing
- Authorities have largely—and deftly—exited exceptional measures to stabilize the financial system, with few ripples in financial markets.
- Macroeconomic policies remain appropriately accommodative; preparations for the exit are well advanced.
- The Fed has skillfully communicated its exit strategy, underpinning confidence in a smooth unwinding of monetary stimulus.
- Fiscal stimulus would remain in place in 2010, with exit envisioned to begin in 2011.

### Long-term legacies and required actions
- Progress made: draft financial reforms broadly address FSAP issues; major health care reform passed; fiscal institutions strengthened; proposed budget incorporates structural measures toward stabilizing debt.
- However, current measures insufficient to stabilize debt over the medium term; effectiveness of health reforms in containing costs is highly uncertain.
- Over the medium term, additional adjustment needed to stabilize debt, including further action on entitlements.
- Financial sector reforms must be implemented and operationalized strongly to prevent reemergence of financial excesses.

### Recovery details, sectoral conditions, and housing fragilities
- Stimulus-related GDP components
  - Auto purchases: cash for clunkers contributed ¾ percentage point to growth in Q3 2009.
  - Residential investment: strong increase through Q1 2010, reversing 15 straight quarters of decline.
- Recovery modest by historical standards; U.S. historically had “V-shaped” recoveries but current expansion is more subdued.
- Sectoral stress: commercial real estate contracting; state and local government spending under pressure; private sector deleveraging continues.
- Current account and trade
  - Current account balance dropped from about 5 percent of GDP pre-crisis to about 3 percent in 2009; trade and capital flows have recovered recently.
- Inflation and slack
  - Headline CPI inflation trended around 2 percent y/y; core inflation declined to about ½ percent on a 3-month SAAR basis.
- Labor market
  - Unemployment higher than any postwar period except brief 1980s point; long-term unemployment, involuntary part-time workers, and unemployment duration at record highs.
  - Long-term unemployment risks scarring and raising structural unemployment.
- Housing market fragilities
  - Housing starts stabilized around 600,000 per year—well below replacement rates implied by demographics.
  - Broad measures of housing prices bottomed out at 30 percent below peak with subdued growth.
  - Mortgage delinquency rates continued to climb in Q1 2010; distressed sales accounted for one third of existing home sales in April 2010; about 2.5 million houses were in foreclosure.
  - “Shadow foreclosure” stock: some 1.7 million homes may be in this stock.
  - Over 11.2 million residential properties with mortgages in negative equity at end-Q1 2010.
  - Over $600 billion in negative equity in home mortgage loans where borrower owes at least 25 percent more than house value.
  - About 130 million housing units in the United States.
- Corporate sector
  - Corporate leverage down; profits rebounded; productivity surged (nonfarm output per hour peaked at 7¾ percent annualized in Q3 2009); unit labor costs dropped by 5 percent in Q4 2009.
  - Large companies tapped capital markets; securitization subdued (ABS issuance: $53 billion over first five months of 2010; $431 billion same period 2006).
  - FSAP: under an adverse scenario almost half of bank holding companies experience some capital shortfall.

### Staff outlook — near term and medium term (Staff’s projections and assessments)
- Near-term GDP growth projection
  - Rebound from -2.4 percent in 2009 to 3¼ percent in 2010.
  - About 3 percent in 2011.
- Drivers: renewed consumption growth and substantial upswing in business fixed investment.
- Inflation and labor market: inflation pressures muted with sizeable output gap; unemployment rate declines only moderately, remaining above 9 percent in 2011.
- Medium-term outlook
  - Permanent output loss expected; potential growth estimated by staff at 2¼ percent.
  - Labor-market adjustment slow; temporary rise in structural unemployment incorporated.
  - Current account: expected to remain around 3½ percent of GDP over the medium term.
- Exchange rate valuation (estimates as of end-March 2010)
  - CGER: dollar about 9 percent above medium-term equilibrium.
  - Net foreign asset position: dollar about 13 percent above equilibrium.
  - Equilibrium exchange rate approach: dollar close to equilibrium.
  - Note: dollar subsequently risen in REER terms by about 3 percent.

### Risks and scenarios
- Mission sees risks tilted to the downside in near term.
- Key downside concerns
  - Foreclosure backlog depressing housing prices and aggravating macro-financial linkages.
  - Stress in commercial real estate affecting small and medium banks and SME credit.
  - Sharp rise in government debt increasing vulnerability to market sentiment.
- Agreed tail risks
  - Strains in Europe that could intensify and spread to U.S. financial system.
  - Deflation as a tail risk given high economic slack.
- Upside possibilities
  - Faster rebound in housing and business fixed investment, leading to brisker consumption.

### Box 1 — U.S. Housing Market: fragile recovery (findings and policy options)
- Housing starts bottomed early 2009, stabilizing around 600,000 per year—well below replacement levels and about one-fourth their peak.
- Existing home sales down 38 percent from peak in early 2009 and remain 20 percent lower than peak levels.
- Case Shiller 20-city composite: rising since mid-2009 but 30 percent below 2006-peak levels.
- Realty Trac: 1.6 million foreclosure filings in first five months of year; 2010 numbers estimated to surpass record 2.8 million in 2009. Overall foreclosure activity surpassed 300,000 for last 15 straight months.
- Shadow inventory: estimated between 1.7 and 7 million homes.
- Over 11 million mortgage properties underwater; estimated negative equity value of $800 billion.
- Administration measures: HAMP accounted for 350,000 permanent modifications out of 1.5 million modifications extended through May; Second Lien Modification Program; Home Affordable Foreclosure Alternatives Program; Alternative Principal Write-down Approach; FHA refinance option allowing principal write-downs; temporary forbearance up to 6 months for unemployed borrowers.
- Policy options if housing destabilizes: expand loan modification program, increase subsidies on principal writedowns, allow mortgage cramdowns in courts.

### A. Fiscal stabilization: public debt trajectory and plans (staff projections and authorities’ plans)
- Staff projection under current policies
  - Federal debt held by the public: 64.0 (2010), 69.0 (2011), 72.4 (2012), 80.4 (2015), 96.3 (2020).
- Staff federal budget balance 1/
  - -11.0 (2010), -8.1 (2011), -5.3 (2012), -5.6 (2015), -7.3 (2020).
- Staff federal primary balance 1/
  - -9.8 (2010), -6.7 (2011), -3.4 (2012), -2.0 (2015), -2.3 (2020).
- Structural primary balance 2/
  - -7.6 (2010), -5.4 (2011), -2.5 (2012), -1.8 (2015), -2.3 (2020).
- Authorities’ draft FY2011 budget objectives
  - Aim to halve the deficit by 2012 and achieve primary balance by 2015, with objective to stabilize debt just above 70 percent of GDP.
  - Envisioned adjustment implies decline of 8½ percent of GDP in the primary deficit by FY2015.
  - Budget would imply up-front adjustment of 2 percentage points of GDP in FY2011.
- Staff adjustment of authorities’ projections based on staff’s growth, inflation, and interest-rate assumptions.
- Risks: rising debt could push interest rates up, damp U.S. growth, and trigger adverse spillovers.

(Footnotes in source: 1/ Deficit estimates adjusted for NPV costs of financial sector support. 2/ Excludes net interest, cyclical effects, and costs of financial sector support.)

### Box 2 — Outlook for Federal Government Finances (staff vs authorities)
- Authorities’ projection under draft FY2011 budget
  - Federal primary deficit projected to shrink to about 1 percent of GDP in FY2015.
  - Federal debt held by the public would reach 77 percent of GDP by end of decade.
  - Authorities indicated intention to find additional savings of about 1 percent of GDP.
- Staff’s alternative projection
  - Primary deficit around 2 percent in FY2015.
  - Federal debt exceeding 95 percent of GDP by end of decade.
  - Stabilizing debt under staff assumptions: roughly a ¾ percent of GDP primary surplus required.
  - Stabilization scenario: phase in further savings of about 2¾ percent of GDP starting FY2013 to stabilize debt around 75 percent of GDP.
- Longer-term pressures
  - Bringing federal debt-to-GDP back to pre-crisis level by 2030 requires gradual adjustment in primary balance of about 6 percent of GDP relative to staff’s baseline projections.
  - This incorporates CBO-assessed health reform savings of ½ percent of GDP a year during next decade (highly uncertain).
- Policy implications and recommended design
  - Required measures: roughly 2¾ percent of GDP in measures above draft FY2011 budget to stabilize debt under staff assumptions.
  - Part of adjustment through expenditure reductions, revenues also needed.
  - Growth-friendly revenue options suggested: further cuts in deductions (particularly mortgage interest), higher energy taxes, a national consumption tax, or a financial activities tax.
  - Design of credible fiscal plan: an upfront adjustment in FY2011; clear commitment to future measures (legislation/targets); further entitlement steps.

### Box 5 — U.S. Exposures to Europe (summary)
- Financial market impacts from European sovereign strains: interbank liquidity and credit spreads climbed; CDS spreads for major U.S. financial institutions picked up; stocks fell; mutual funds cut exposure to European banks and shortened maturities; pension funds pulling back; corporate bond spreads widened; corporate bond issuance fell sharply; flight to quality lifted dollar and pushed down Treasury yields.
- Trade exposure: U.S. has relatively low trade openness with Europe; very limited export exposure to GIIPS; modest exposures to Euro area and United Kingdom.
- Financial linkages stronger than trade linkages:
  - U.S. banks’ claims on GIIPS: about 4 percent of financial assets but slightly more than 60 percent of Tier-1 capital.
  - Claims on larger European economies, including U.K.: account for 30 percent of total assets and close to 450 percent of Tier-1 capital.
- Implication: financial deterioration in Europe—especially if it spreads beyond GIIPS—could materially tighten U.S. financial conditions; limited data on derivatives increases uncertainty.

(Selected tabulated indicators from source: GIIPS (goods) 1/0.2; Euro area 1.9; United Kingdom 0.7. U.S. banks' total financial claims on European countries in 2009Q4: GIIPS 2/6434.157.1; Other continental Europe 3/2,52316.0224.0; United Kingdom 2,01512.8178.9. Source notes provided in original.)

### Multilateral approach, trade policy, and staff appraisal
- Multilateral policy coordination remains important in recovery and crisis phases; authorities coordinate in international fora.
- U.S. contributions to global stability: raising savings (fiscal consolidation) and strengthening financial sector.
- Staff encouraged concluding Doha Round; welcomed limited U.S. recourse to protectionism; urged narrow application of Buy America and rollback of discretionary import safeguard measures.
- Staff appraisal: recovery underway aided by massive policy response; further efforts needed to secure durable expansion.
- Three main policy challenges: economic and financial stabilization; exit from extraordinary support; dealing with long-term legacies (fiscal sustainability and financial reform).
- Near-term guidance: maintain strong macro support in 2010; envisioned withdrawal in 2011 appropriate under baseline; monetary support can be sustained to offset fiscal drag; options exist for smaller up-front fiscal adjustment if downside risks materialize, complemented by measures to bolster medium-term credibility.

### Monetary exit and Federal Reserve role
- Fed well placed to manage monetary exit; expanded toolkit allows navigation of transmission uncertainties.
- Fed has credibly communicated commitment to sustain accommodative monetary conditions while preparing for exit.
- Continued clear communication about strategy and operations essential during exit.

### Annex I — United States: Fund Relations (selected items, As of April 30, 2010)
- Joined: 12/27/45; Article VIII.
- Quota: 37,149.30 SDR Million (100.00 percent).
- Fund holdings of currency: 29,579.52 SDR Million (79.62 percent).
- Reserve position in Fund: 7,568.63 SDR Million (20.37 percent).
- SDR Department net cumulative allocation: 35,315.68 SDR Million (100.00 percent); holdings: 36,881.95 SDR Million (104.44 percent).
- Outstanding Purchases and Loans: None. Financial Arrangements: None. Projected Obligations to Fund: None.
- Exchange rate: U.S. dollar floats independently and is determined freely.
- Sanctions: U.S. administers approximately 30 economic sanctions programs (examples listed in source).
- Article IV and FSAP: 2009 Article IV concluded July 2009; FSAP conducted Fall 2009 and Spring 2010; 2010 Article IV discussions May 11–June 28; staff report publication and board dates noted in source.
- Data dissemination: United States subscribes to SDDS; comprehensive economic data available on timely basis.

### Selected numerical projections and historical series (selected rows from IMF table)
- Real GDP: 2009: -2.4; 2010: 3.3; 2011: 2.9.
- Unemployment rate: 2009: 9.3; 2010: 9.7; 2011: 9.2.
- CPI inflation: 2009: -0.3; 2010: 1.6; 2011: 1.1.
- Federal balance (percent of GDP), fiscal years: 2009: -11.3; 2010: -11.0; 2011: -8.1.
- Debt held by the public (percent of GDP): 2009: 53.0; 2010: 64.0; 2011: 69.0.
- Three-month Treasury bill rate: 2009: 0.2; 2010: 0.1; 2011: 0.3.
- Ten-year government bond rate: 2009: 3.3; 2010: 3.6; 2011: 4.7.
- Current account balance (percent of GDP): 2009: -2.7; 2010: -3.2; 2011: -3.4.
- Gross national saving (percent of GDP): 2009: 10.8; 2010: 12.5; 2011: 14.2.
- Gross domestic investment (percent of GDP): 2009: 15.0; 2010: 16.0; 2011: 17.6.

_Italic line: Source: _cr10249 – EXECUTIVE SUMMARY and associated excerpts from the IMF staff report and annexes (content unit: _cr10249)._

### EXECUTIVE SUMMARY

### _cr10249 - EXECUTIVE SUMMARY

### Context
- The economy is recovering thanks to unprecedented macroeconomic policy stimulus, emergency financial stabilization measures, and a gathering cyclical upswing.
- The expansion is subdued by historical standards, owing to balance-sheet headwinds in the financial and household sectors.
- Risks are tilted to the downside, notably those emanating from spillovers associated with sovereign strains in Europe.

### Assessment
- Authorities need to cautiously complete the exit from extraordinary policy support and decisively deal with long-term legacies, namely fiscal imbalances and (as identified in the Financial Sector Assessment Program (FSAP)) gaps in financial regulation, to secure stable medium-term growth, limit adverse international spillovers, and contain risks of new financial excesses.
- Authorities have a more optimistic economic outlook than staff, and correspondingly see the required medium-term fiscal adjustment to be smaller, but broadly agree with the challenges ahead.
- Fiscal stabilization and strong implementation of financial reforms are priorities.

### Policy recommendations
- Macroeconomic stimulus:
  - Maintain stimulus in 2010 while the recovery is still gaining traction.
  - In 2011, make the planned down-payment on fiscal consolidation (with flexibility on the size of adjustment if risks materialize).
  - Balance-sheet headwinds and tail risks (including deflation) call for a cautious monetary exit.
- Fiscal stabilization:
  - Develop a credible plan for stabilizing debt/GDP over the medium term, which would entail a larger adjustment than under the authorities’ budget path, without jeopardizing the recovery.
  - A credible plan would have three elements—an upfront adjustment (the planned adjustment in 2011 would be appropriate under staff’s baseline outlook), clear commitment to future measures (perhaps by enshrining targets in legislation), and further entitlement reforms—with tradeoffs among them if necessary, say in a downside risk scenario.
  - Over the long term, the aim should be to put the debt ratio on a downward path.
- Financial reform:
  - Banks remain vulnerable to shocks and will need additional capital to lend when credit demand recovers.
  - Tighten regulation to lower systemic risks (with more robust consolidated supervision, stricter standards on systemic institutions to discourage systemic size and complexity, and an improved resolution mechanism).
  - Implement promptly steps to revitalize securitization, and quickly bring a macro-prudential focus to the council of regulators.

### Key near-term findings and indicators
- Cumulative GDP growth totaled 1.9 percent (unannualized) over the second half of 2009, compared with a peak-to-trough decline of 3.7 percent.
- First quarter 2010 GDP rose 0.7 percent (unannualized; 2.7 percent, annualized).
- The Federal Reserve cut its target rate to an all-time low of 0–25 basis points.
- The American Recovery and Reinvestment Act of 2009 totaled about 5 percent of one year’s GDP during 2009–11.
- Overall, stimulus added over 1 percent to growth in 2009, with a smaller effect expected in 2010, and negative contributions starting in 2011.
- Inventories subtracted 3¾ percent (seasonally adjusted at an annual rate) from GDP growth in the first half of 2009; they contributed 3¾ percentage points to growth in the fourth quarter of 2009 and a further 1½ percentage points in the first quarter of 2010.

### Financial sector and balance-sheet headwinds
- Policy response stabilized financial conditions via capital injections in major financial institutions, emergency lending, stress tests, and guarantees.
- Financial conditions remain dependent on policy support and are still tight for:
  - Small and medium-sized enterprises reliant on financing from smaller banks (hit hard by commercial real estate losses).
  - Segments dependent on the still-weak private securitization markets.
- Systemic financial institutions have increased capital and improved its quality, but:
  - High provisioning expenses are weighing on profitability.
  - System-wide, loan losses appear to be peaking, yet reserves are low by historical standards.
  - High delinquencies and substantial exposure in real estate are key risks.
  - Banks are keeping lending standards high and demand for loans is weak.

### Exit strategy and sequencing
- Authorities have largely—and deftly—exited exceptional measures to stabilize the financial system, with few ripples in financial markets.
- Macroeconomic policies remain appropriately accommodative, although preparations for the exit are well advanced.
- The Fed has skillfully communicated its exit strategy, underpinning confidence in a smooth unwinding of monetary stimulus.
- Fiscal stimulus would remain in place in 2010, with the exit envisioned to begin in 2011.

### Long-term legacies and required actions
- Progress has been made on long-term legacies, but more remains to be done:
  - Draft financial reforms broadly address issues raised in the FSAP assessment.
  - A major health care reform that dramatically expands coverage and introduces cost-containment measures has been passed.
  - Fiscal institutions have been strengthened, and the proposed budget incorporates structural measures that would make progress toward stabilizing the debt over the medium term.
- However, current measures are insufficient to stabilize debt over the medium term, and the effectiveness of health reforms in containing costs is highly uncertain.
- Over the medium term, additional adjustment will be needed to stabilize debt, including further action on entitlements.
- Financial sector reforms must be implemented and operationalized strongly to prevent the reemergence of financial excesses over time.

### Analytical work and team
- Background studies cover shocks to structural unemployment, risks of a jobless recovery, determinants of savings rate, debt accumulation and interest rates, the fiscal gap, and an evaluation of housing finance in the United States.
- Staff: The team comprised David Robinson (head), Charles Kramer, Marcello Estevão, Nicoletta Batini, Oya Celasun, Andrea Maechler, Martin Sommer, Evridiki Tsounta, Grace Bin Li (all WHD), Francesco Columba, John Kiff (both MCM), and Ashok Bhatia (SPR). Brad McDonald and Mika Saito (SPR) contributed with advice on trade policy and Joseph Myers and Steve Dawe (LEG) with analysis on AML/CFT issues.

*Source: _cr10249 - EXECUTIVE SUMMARY — https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10249.pdf*

### 4.       The result was a strong bounce in

### _cr10249 - 4.       The result was a strong bounce in

### Stimulus-related components of GDP
- Auto purchases surged in the third quarter of 2009 thanks to the “cash for clunkers” subsidy program, contributing a full ¾ percentage point to growth.
- Residential investment posted a strong increase through the first quarter of 2010, on the back of favorable financing conditions and tax breaks for home purchases, reversing an unprecedented 15 straight quarters of decline.
- Overall, the U.S. rebound was relatively strong compared with that in other G7 countries.

### Recovery strength, sectoral stress, and historical comparisons
- Despite massive stimulus, the recovery is modest by historical standards.
- The United States has traditionally enjoyed “V-shaped” recoveries, but data thus far point to a more subdued recovery than in historical experience.
- A rough rule of thumb that the expansion is proportional to the contraction would imply an expansion of 6 percent per annum over 8 quarters of expansion, well above the rates projected by staff and others.
- Selected sectors remain under stress:
  - Commercial real estate continues to contract.
  - State and local government spending is under pressure due to balanced-budget arrangements that effectively rule out a countercyclical response.
  - Private sector deleveraging continues.

### Current account, trade collapse, and capital flows
- U.S. exports and imports both contracted sharply during the global collapse in trade, causing the current account balance to drop from about 5 percent of GDP in the pre-crisis years to about 3 percent in 2009.
- The composition of financing shifted sharply, with sizeable flows into U.S. treasury securities amid a “flight to quality,” which also triggered a sharp appreciation in the dollar.
- More recently, trade and capital flows have recovered, but the current account remains modest relative to pre-crisis levels.

### Inflation and slack
- With economic slack large, core inflation has remained low.
- Headline CPI inflation has recently trended around 2 percent y/y, with some volatility owing to swings in fuel prices.
- Core inflation has declined significantly to about ½ percent on a 3-month SAAR basis.

### Labor market weakness and scarring risks
- The unemployment rate is higher than in any postwar period save a brief point in the 1980s.
- Unemployment duration, the percent of long-term unemployed, and the number of involuntary part-time workers are all at record highs.
- The level of long-term unemployment is particularly worrisome because it erodes labor skills and could add to structural unemployment while reducing lifetime earnings.
- Labor reallocation is apt to be slow due to heightened skills and geographical mismatches, which are estimated to have raised equilibrium unemployment rates across states and in the nation as a whole (Selected Issues Paper, Chapter I).
- Underwater mortgages (where debt exceeds the value of the house) seem to have been impeding geographical reallocation by making it difficult for homeowners to sell their houses to move in search of better job prospects.

### Housing market fragilities
- Housing starts have stabilized but remain around historical lows and well below replacement rates implied by demographic trends.
- Broad measures of housing prices seem to have bottomed out, at 30 percent below peak, but register at best subdued growth.
- Mortgage delinquency rates continued to climb in the first quarter of 2010, and foreclosure supply remains large; in April 2010, distressed sales accounted for one third of existing home sales, and about 2.5 million houses were in foreclosure.
- Mortgages in serious delinquency have run far ahead of foreclosures, reflecting enhanced foreclosure mitigation efforts and indications that banks are struggling to process a backlog of foreclosures.
- Some 1.7 million homes may be in the “shadow foreclosure” stock that could hit the market in the future, depressing home prices.
- More than 11.2 million residential properties with mortgages were in negative equity at the end of the first quarter of 2010.
- There are over $600 billion in negative equity in home mortgage loans for which the borrower owes at least 25 percent more than what the house is worth.
- There are about 130 million housing units in the United States.

### Corporate sector resilience and financial conditions
- Corporate leverage has come down, and profits have rebounded notwithstanding the collapse in demand, as companies slashed investment and payrolls during the downturn.
- Productivity surged, with annualized growth in nonfarm output per hour peaking at 7¾ percent in the third quarter of 2009, and unit labor costs dropping by 5 percent in the fourth quarter.
- Large companies have been able to tap capital markets for equity and debt, bypassing the weakened banking system.
- Corporations have ramped up investment spending, supporting demand.
- After bottoming out in March 2009, stock markets recovered over 60 percent of what they had lost since the beginning of the crisis.
- Starting in early April 2010, concerns about contagion from the European sovereign debt crisis fueled a broad market sell-off with sharply lower equity and commodity prices, wider corporate spreads, and a surge in market volatility.
- Short-term funding spreads shot up sharply but remained well below Lehman-crisis levels.
- A “flight-to-quality” pushed the 10-year Treasury bond yield from 3.9 percent at end-April to below 3 percent in June, while the dollar gained about 6.4 percent against the euro since end-April.
- Securitization activity remained subdued:
  - ABS issuance totaled $53 billion over the first five months of 2010, similar to the amount during the same period in 2009 and compared with $431 billion in the same period of 2006.
- Financial institutions have managed to rebuild capital ratios, in part by shedding risk, but default and charge-off rates remain high and uncovered bad assets continue to rise to high levels.
- FSAP analysis notes that under an adverse scenario almost half of bank holding companies experience some capital shortfall.

### Looking ahead: balance-sheet strains and headwinds to growth
- Household sector:
  - Household saving has ranged above pre-crisis levels as households attempt to rebuild net wealth following a major shock (100 percent of GDP), albeit with some volatility (peaking at 6.4 percent in May 2009 before declining).
  - Households continue to deleverage, and saving may have further to rise before the process of balance-sheet repair is done (Selected Issues Paper, Chapter II).
- Financial sector:
  - Rebuilding of capital ratios has been accompanied by shedding risk, but uncovered bad assets and high default and charge-off rates pose ongoing vulnerabilities.
- Public sector:
  - Federal debt held by the public nearly doubled between 2007 and 2010 to 64 percent of GDP—the highest since 1950, when debt was inflated by the legacy of World War II.

*Source: _cr10249*

### 14.      The staff’s outlook is for a continued gradual recovery, with inflation contained

### 14.      The staff’s outlook is for a continued gradual recovery, with inflation contained

### Staff near-term outlook: continued gradual recovery; inflation contained; high unemployment
- GDP growth projection:
  - Rebound from -2.4 percent in 2009 to 3¼ percent in 2010.
  - About 3 percent in 2011.
- Drivers of the rebound:
  - Renewed growth in consumption.
  - A substantial upswing in business fixed investment.
- Inflation and output gap:
  - Inflation pressures would remain muted, against a backdrop of a sizeable output gap.
- Labor market:
  - Unemployment rate would decline only moderately, remaining above 9 percent in 2011.
- Financial and global context:
  - Financial conditions improving more than expected.
  - Global growth above expectations.
  - Recent data registered stronger than prior staff forecasts.

### Medium-term outlook: lower potential growth and permanent output loss
- Permanent output loss:
  - Potential growth would remain below trend for a period, with a permanent output loss owing to the financial crisis.
  - Forecast informed by analysis, including World Economic Outlook, that points to permanent output losses following financial and housing crises.
- Labor-market adjustment:
  - Labor-market adjustment is apt to be slow; forecast incorporates a temporary rise in structural unemployment.
- Investment effects:
  - Forecast factors in short-run effects from the sharp recent decline in investment (which weighs on capital accumulation).
- Convergence:
  - Over time, growth would move toward medium-term potential, estimated by staff at 2¼ percent.

### Savings, investment, and current account medium-term outlook
- Medium-term shifts:
  - Medium-term shifts in savings and investment would broadly offset each other, stabilizing the current account over the medium term.
- Crisis-era dynamics:
  - The current account shrank amid the crisis as rising private saving and falling private investment more than offset the increase in public dissaving.
- Expected medium-term adjustments:
  - Household saving is expected to rise further as households rebuild wealth lost in the financial and housing crisis, and save more in light of fiscal imbalances.
  - Fiscal deficit would narrow as the cycle improves, stimulus expires and budgetary measures come into place.
  - Private investment would rebound to around pre-crisis averages as a percentage of GDP.
- Current account level:
  - On balance, the current account would remain around 3½ percent of GDP over the medium term.

### External imbalance and the dollar
- CGER assessment:
  - The current account would remain somewhat below long-run saving/investment norms as assessed by the Coordinating Group on Exchange Rates (CGER), which estimates the dollar to be about 9 percent above its medium-term equilibrium level on that basis.
- Other valuation approaches:
  - The net foreign asset position implies that the dollar is about 13 percent above equilibrium.
  - The equilibrium exchange rate approach finds the dollar to be close to equilibrium.
- Authorities’ stance:
  - Authorities noted the exchange rate remained market determined and did not take a view on its valuation relative to fundamentals.
- Note on timing:
  - The estimates are as of end-March 2010; the dollar has subsequently risen in REER terms by about 3 percent.

### Assessment of forecasts and authorities’ views
- Authorities’ views:
  - Treasury and OMB officials viewed staff’s forecasts as too pessimistic.
  - Cited historical experience with V-shaped recoveries and the robust policy response.
  - Saw output returning to its long-term trend over the medium term, with potential growth in the 2½ to 2¾ percent range.
- Staff vs authorities:
  - Authorities considered their forecasts conservative and believed upside growth surprises were nontrivial.

### Risks to the outlook
- Mission assessment:
  - Overall, the mission saw risks as tilted to the downside in the near term.
- Key downside concerns:
  - Foreclosure backlog that could push down housing prices and aggravate negative macro-financial linkages.
  - Stress in commercial real estate: small to medium sized banks exposed could experience outsized losses, crimping credit provision to SMEs.
  - Sharp rise in government debt increased vulnerabilities to financial market sentiment.
- Authorities’ view:
  - Authorities saw risks as more balanced, citing foreclosure-mitigation efforts and heightened supervisory attention to commercial real estate exposures.
- Tail risks agreed by both:
  - Strains in Europe that could intensify and spread to the U.S. financial system via interbank and derivatives markets.
  - Deflation as a tail risk given high economic slack.
- Upside possibilities:
  - Activity (notably housing and business fixed investment) could rebound faster and confidence could recover briskly, spurring consumption spending.

### Policy challenges: completing the exit and addressing legacies
- Overarching goal:
  - Policies should focus on completing the exit and dealing with long-term legacies to attain stable medium-term growth, limit international spillovers, and avoid future financial excesses.
- Near-term challenge: timing the exit from macroeconomic stimulus
  - Given remaining weaknesses, authorities should maintain policy stimulus in 2010.
  - The withdrawal of macroeconomic stimulus will need to be tuned to the speed of the recovery.
  - Given risks posed by budgetary imbalances, the ground should be laid for fiscal consolidation, with a determined start made in 2011.
  - Monetary policy can maintain an accommodative stance to offset fiscal drag.
- Dealing with legacies:
  - A credible and strong consolidation plan is needed to anchor confidence in fiscal sustainability, particularly given the risk of an adverse reaction in bond markets and high dependence on foreign inflows.
  - Far-reaching financial sector reforms are required to avoid re-emergence of financial excesses that could exacerbate future fiscal imbalances.

### Box 1 — U.S. Housing Market: A Fragile Recovery (findings and policy options)
- Current state of housing market:
  - Housing market has stabilized, but most activity indicators remain near record low levels.
  - Housing starts bottomed in early 2009, stabilizing at around 600,000 per year—well below replacement levels implied by demographics, and almost one-fourth their peak.
  - Existing home sales have somewhat recovered from record low levels in early 2009 (when they were down 38 percent from their peak), but remain 20 percent lower than their peak levels.
- House prices and foreclosures:
  - Case Shiller 20-city composite price index has been rising since mid-2009 but remains 30 percent below its 2006-peak levels.
  - Realty Trac: 1.6 million foreclosure filings in the first five months of this year, with 2010 numbers estimated to surpass the record 2.8 million recorded in 2009.
  - Overall foreclosure activity surpassed 300,000 for the last 15 straight months.
  - Shadow inventory estimated at between 1.7 and 7 million homes.
  - Over 11 million mortgage properties are now underwater, with an estimated negative equity value of $800 billion.
- Administration measures and outcomes:
  - Home Affordable Modification Program (HAMP) reduces monthly payments and provides incentives; slow start but accounting for 350,000 permanent modifications out of the 1.5 million modifications extended through May.
  - Second Lien Modification Program enacted to facilitate write-offs of second liens.
  - Home Affordable Foreclosure Alternatives Program encourages short sales and deed-in-lieu for borrowers unable to complete a modification.
  - New measures to be implemented by fall include the Alternative Principal Write-down Approach (subsidizes principal writedowns to mortgages over 15 percent underwater), FHA refinance option allowing principal write-downs for non-FHA insured underwater mortgages, and a temporary forbearance period of up to 6 months for unemployed borrowers.
- Policy options if housing destabilizes again:
  - Expand the loan modification program, including additional incentives to investors and servicers and loosening some eligibility requirements.
  - Increase subsidies on principal writedowns.
  - Allow mortgages to be renegotiated in courts (“cramdowns”), an option staff advocated in the past.

### A. Fiscal stabilization: public debt trajectory and authorities’ plans
- Staff concern:
  - Key macroeconomic challenge is ensuring that public debt is put—and is seen to be put—on a sustainable path without jeopardizing the recovery.
- Staff projections under current policies:
  - Federal debt held by the public could rise from 64 percent to 95 percent of GDP by 2020.
  - Thereafter, population aging and health-care inflation would push debt higher, swelling over 135 percent of GDP by 2030 and continuing to trend up thereafter.
- Risks of high debt:
  - Rising debt trajectory could engender a rise in interest rates that would dampen U.S. growth and risk adverse spillovers to global financial conditions.
- Authorities’ draft FY2011 budget objectives and assumptions:
  - Aim to halve the deficit by 2012, and achieve primary balance by 2015, with an objective to stabilize the debt just above 70 percent of GDP.
  - Envisioned adjustment implies a decline of 8½ percent of GDP in the primary deficit by FY2015.
  - Measures include a freeze on non-security discretionary spending and partial expiration of 2001 and 2003 tax cuts.
  - Budget would imply a sizeable up-front adjustment—2 percentage points of GDP—in FY2011.
  - Staff fiscal projections adjust the authorities’ budget projections for staff’s growth, inflation, and interest-rate assumptions.
- Staff fiscal projections (selected figures):
  - Federal budget balance 1/: -11.0 (2010), -8.1 (2011), -5.3 (2012), -5.6 (2015), -7.3 (2020).
  - Federal primary balance 1/: -9.8 (2010), -6.7 (2011), -3.4 (2012), -2.0 (2015), -2.3 (2020).
  - Structural primary balance 2/: -7.6 (2010), -5.4 (2011), -2.5 (2012), -1.8 (2015), -2.3 (2020).
  - Federal debt held by public: 64.0 (2010), 69.0 (2011), 72.4 (2012), 80.4 (2015), 96.3 (2020).
- Footnotes/definitions:
  - 1/ Deficit estimates are adjusted for NPV costs of financial sector support.
  - 2/ Excludes net interest, cyclical effects, and costs of financial sector support.
  - Staff sources: IMF staff estimates.

*IMF staff report (content unit: _cr10249 - 14. The staff’s outlook is for a continued gradual recovery, with inflation contained).*

### Box 2. Outlook for Federal Government Finances

### Box 2. Outlook for Federal Government Finances

### Federal debt trajectory and authorities' outlook
- Federal debt is on an unsustainable trajectory.
- Under the draft FY2011 budget, the federal primary deficit is projected by the authorities to shrink to about 1 percent of GDP in FY2015.
- Under the draft FY2011 budget, federal debt held by the public would continue to rise, reaching 77 percent of GDP by the end of decade.
- The authorities have indicated their intention—including by establishing a fiscal commission—to find additional savings of about 1 percent of GDP.
- Under the authorities' macroeconomic assumptions, eliminating the primary deficit and stabilizing federal debt relative to GDP would follow from these measures.

### Staff’s more pessimistic macroeconomic assumptions and alternative projection
- Staff projects a bleaker budgetary outlook under more pessimistic macroeconomic assumptions:
  - The financial crisis is expected to lead to a permanent loss of output and budgetary revenues.
  - The primary deficit would remain around 2 percent in FY2015.
  - Federal debt would exceed 95 percent of GDP by the end of the decade, approaching levels last seen in the aftermath of WWII, putting upward pressure on interest rates.
- Stabilizing debt under the staff’s assumptions:
  - A primary balance would be insufficient to stabilize debt—roughly a ¾ percent of GDP primary surplus would be needed instead.
  - Phasing in further savings of about 2¾ percent of GDP starting from FY2013 would stabilize the federal debt held by the public around 75 percent of GDP.
- Footnote on sensitivity:
  - "The required adjustment would rise by about ¾ percentage point of GDP for each 1 percentage point increase in interest rates and decline by roughly ¼ percentage point for each 1 percentage point increase in output level."

### Longer-term pressures and adjustment needed
- Additional measures will be necessary to put the debt ratio firmly on a downward path in the longer term given rapidly-growing health care costs and population aging.
- Bringing the federal debt-to-GDP ratio back to the pre-crisis level by 2030 would require a gradual adjustment in the primary balance of about 6 percent of GDP relative to the staff’s baseline deficit projections.
  - This calculation incorporates potential savings from the recent health care reform, as assessed by the Congressional Budget Office (½ percent of GDP a year during the next decade). These savings are deemed highly uncertain.

### Key quantified comparisons and requirements (as presented)
- Authorities’ draft budget projection:
  - Federal primary deficit projected to shrink to about 1 percent of GDP in FY2015 (authorities' projection).
  - Federal debt held by the public would reach 77 percent of GDP by end of decade (authorities' projection).
- Staff projection:
  - Primary deficit around 2 percent in FY2015 (staff assumption).
  - Federal debt exceeding 95 percent of GDP by end of decade (staff projection).
  - Required to stabilize debt: roughly a ¾ percent of GDP primary surplus (staff estimate).
  - Stabilization scenario: phase in further savings of about 2¾ percent of GDP starting from FY2013 to stabilize debt around 75 percent of GDP.
- Long-term path:
  - Adjustment needed to bring debt back to pre-crisis level by 2030: about 6 percent of GDP relative to staff’s baseline.
  - CBO-assessed health reform savings included in that figure: ½ percent of GDP a year during the next decade (highly uncertain).

### Policy implications and recommended design of adjustment
- The mission’s assessment:
  - Federal primary surplus of ¾ percent of GDP is required to stabilize debt under staff’s economic assumptions, implying roughly 2¾ percent in measures above those in the draft FY2011 budget.
  - Part of the required adjustment could be achieved through expenditure reductions, but revenue measures would also be needed.
  - Suggested relatively "growth friendly" revenue options include further cuts in deductions (particularly for mortgage interest); higher energy taxes; a national consumption tax; or a financial activities tax (which could also mitigate systemic financial risks).
  - Over the longer term, the aim should be to put public debt firmly on a downward path to rebuild the room for fiscal maneuver.
- Design of credible fiscal plan:
  - An upfront adjustment in FY2011;
  - A clear commitment to the additional future measures needed, for example, by enshrining targets and/or measures in legislation, under credible economic assumptions;
  - Further steps to address entitlement pressures, given uncertain payoffs from health care reforms—reforms could address imbalances in social security, where the needed measures are well known and payoffs more certain.

*Box 2. Outlook for Federal Government Finances*

### Box 5. U.S. Exposures to Europe

### Box 5. U.S. Exposures to Europe

### Financial market developments and immediate effects
- Financial market strains from sovereign pressures in Europe are being felt in U.S. markets:
  - Interbank liquidity and credit spreads have climbed significantly.
  - CDS spreads for major U.S. financial institutions have picked up, and stocks have fallen.
  - U.S. mutual funds have cut their exposure (via CP markets) to European banks, and shortened maturities.
  - Indications that longer-term real money investors such as pension funds are also pulling back from European markets.
  - Corporate bond spreads have widened; in May, corporate bond issuance fell sharply amid volatile market conditions.
  - Flight to quality flows have lifted the dollar and pushed down treasury yields.

### Trade exposure channel
- The United States has relatively low trade openness with Europe:
  - Very limited export exposure to GIIPS.
  - Modest exposures to the Euro area and the United Kingdom.
- Any further demand contraction in these economies would have a noticeable but small impact on U.S. economic activity through the export channel.

### Financial linkages and vulnerabilities
- Financial linkages with Europe are much stronger than trade linkages:
  - U.S. banks’ claims on GIIPS are about 4 percent of financial assets but slightly more than 60 percent of Tier-1 capital.
  - Claims on larger European economies, including the U.K., account for 30 percent of total assets, and close to 450 percent of tier-1 capital.
- Financial conditions in the U.S. could tighten considerably if strains spread from the GIIPS to larger European economies, with potentially severe consequences for economic activity.
- Important uncertainties remain about possible channels of transmission, including derivatives markets, for which data are relatively limited.

### Tabulated/quoted indicators (as presented in source)
- 2009
- GIIPS (goods) 1/0.2
- Euro area1.9
- United Kingdom0.7
- 1/ Greece, Ireland, Italy, Portugal, and Spain.
- United States: Exports to Europe
  (percent of GDP, goods and services, unless otherwise noted)
- Sources: Bureau of Economic Analysis; IMF, DOTS Database; and Fund staff estimates.
- Billions of dollars
- Percent of total 
  assets
- Percent of tier 1 
  capital
- GIIPS 2/6434.157.1
- Other con tin ental Euro pe 3/2,52316.0224.0
- United King do m2,01512.8178.9
- U.S. Banks' Total Financial Claims on European Countries in 2009Q4 1/
- 3/ Austria, Belgium, Denmark, France, Germany, Luxembourg, Netherlands, Slovakia, Slovenia, 
  and Switzerland.
- 2/ Greece, Italy, Ireland, Portugal, and Spain.
- 1/ Includes derivatives, unused credit commitments, and guarantees.
- Sources: Bank for International Settlements (Consolidated Foreign Claims of Reporting Banks, 
  Ultimate Risk Basis), and Fund staff estimates.

### Implications
- While trade spillovers from a European demand contraction to the U.S. would be limited, stronger financial links imply that a financial deterioration in Europe—especially if it spreads beyond GIIPS—could materially tighten U.S. financial conditions.
- Limited data on derivatives and other transmission channels increases uncertainty about the full extent of U.S. exposures.

*Italic line: Source: _cr10249 - Box 5. U.S. Exposures to Europe (excerpted content provided).*

### 43.      The mission observed that a multilateral approach to economic policy

### _cr10249 - 43.      The mission observed that a multilateral approach to economic policy

### Multilateral approach and international coordination
- The mission observed that a multilateral approach to economic policy management would be as important in the recovery as in the crisis.
- The mission welcomed the authorities’ continued work to coordinate with other policymakers in international fora.
- The mission noted the authorities’ efforts to promote international financial and economic stability, most recently through the Fed’s redeployment of its dollar swap lines to foreign central banks in response to dollar funding strains caused by sovereign stress in Europe.
- Footnote figures cited by the mission:
  - The Federal Reserve projects that about $200 billion of agency debt and MBS and $140 billion of Treasury securities will mature by the end of 2011.
  - The fed funds rate had remained below the IOR for some time, owing to unremunerated parties in the system, and limited arbitrage by banks.

### Key contributions of U.S. policy to global stability and growth
- Staff view: the key contributions that the United States can make to global growth and stability are raising savings and strengthening the financial sector.
- Higher savings—particularly via fiscal consolidation—can:
  - Help ensure the current account deficit remains within sustainable levels.
  - Avoid higher U.S. interest rates that would adversely affect global financial conditions.
- Strengthening the financial sector can:
  - Support U.S. growth.
  - Curtail the risk of future financial imbalances detrimental to U.S. and global financial stability.
- Medium-term considerations:
  - Household saving is apt to rise, implying the United States could no longer play the role of global consumer of last resort.
  - Growth rebalancing requires measures to boost demand in current account surplus countries.
  - The mission views the U.S. dollar as now overvalued from a medium-term perspective; greater exchange rate flexibility elsewhere would be needed to accompany rebalancing.

### Authorities’ stance and multilateral initiatives
- Authorities agreed on the need for global rebalancing of demand and did not see it as underway at present.
- Authorities saw a substantial risk of deficient global demand, especially if fiscal exits were unduly rapid and uncoordinated.
- The G-20 Mutual Assessment Process (MAP) exercise was seen as useful to promote focused international discussions and encourage coordination.
- Authorities agreed that U.S. fiscal consolidation had a large contribution to make over the medium term and concurred that currency flexibility in surplus countries is essential to global rebalancing.

### Trade policy and Doha Round
- The mission encouraged authorities to redouble efforts to conclude the Doha Round of trade negotiations.
- Staff welcomed the limited U.S. recourse to protectionism, noting a notable exception: safeguard measures against Chinese tires.
- Staff called on the Administration to:
  - Apply the Buy America provisions in the stimulus bill as narrowly as allowed.
  - Roll back quickly discretionary import safeguard measures.
- Emphasis by the U.S. on a strong multilateral trade system with enhanced trade policy monitoring initiatives was helping limit new trade measures as a drag on global recovery.
- Authorities’ objective:
  - Goal of doubling exports over five years—ambitious quantitatively—sends a signal to sustain or increase openness.
  - An early conclusion of the Doha Round would support an increase in U.S. exports and help contain the risks of renewed protectionism.
  - Authorities focused in trade negotiations on expanding jobs and economic growth by creating new export opportunities; they judged present Doha Round offers as inadequate in this regard.

### Figure 12: Trade, financial flows and the dollar (summary observations)
- U.S. imports and exports have been recovering since worldwide trade collapsed at the start of the crisis.
- Volumes of U.S. exports are off their troughs, especially for automotive products.
- Improving market conditions allowed the Fed's swap lines to reduce, while U.S. bank outflows picked up.
- U.S. residents' safe haven flows appear to have reversed, and foreigners' purchases of Treasuries are up.
- Concerns about Europe seem to influence recent exchange rate moves.
- Markets are signaling somewhat elevated fears of large movements in the U.S. dollar exchange rate.

### Staff appraisal: recovery, risks, and policy priorities
- Recovery status:
  - Aided by a massive policy response, economic recovery is underway, but further efforts are needed to secure a strong and durable expansion.
- Three main policy challenges from the crisis:
  - Economic and financial stabilization.
  - Exit from extraordinary support.
  - Dealing with long-term legacies (fiscal sustainability and financial reform).
- Policy stance and near-term guidance:
  - Strong macroeconomic support remains appropriate for this year given weak demand, high unemployment, and lingering financial strains.
  - On the fiscal side, stimulus should be maintained in 2010 as planned; the envisioned withdrawal in 2011 is appropriate under the baseline outlook.
  - Monetary support can be sustained for an extended period given quiescent inflation risks and to help offset fiscal drag beginning next year.
  - If downside risks materialize, options include a smaller up-front fiscal adjustment complemented by measures to bolster medium-term credibility (such as entitlement reforms) and further monetary accommodation.

### Fiscal sustainability and entitlements
- Public debt trajectory:
  - Over the medium term, the debt/GDP ratio is set to rise to levels not seen since immediately following the Second World War, with further upward pressures later from entitlement spending.
  - Under staff’s economic assumptions, a major adjustment will be needed to stabilize the debt/GDP ratio by 2015, entailing both expenditure and revenue measures.
- Policy recommendations on fiscal consolidation:
  - Ensure the adjustment envisioned for 2011 is accompanied by an appropriately strong commitment to medium-term stabilization, including legislated targets and further steps on entitlements.
  - Beyond 2015, fiscal policy should aim to put public debt on a declining path relative to GDP to rebuild fiscal room for maneuver.
- Entitlement reforms:
  - The recent health-care reform provides a welcome basis for cost control, but payoffs from its measures are highly uncertain.
  - The unsustainable rate of health-care cost inflation presents the major risk to long-run fiscal stability.
  - It will be essential for the Medicare cost commission (IPAB) to closely monitor health care costs; remedial action may be needed (e.g., cuts in exemptions for insurance premiums).
  - Further action is also needed on social security, where needed measures are well known and payoffs more certain.

### Financial sector reform and regulatory priorities
- Financial sector condition:
  - Risk-based capital ratios have rebounded strongly, in part due to de-risking, while risks to banks remain sizeable.
  - With private securitization markets still impaired, banks may lack the balance-sheet strength to lend strongly when credit demand recovers.
  - Banks must fully recognize risks on their balance sheets and have sufficient capital to support the ongoing recovery.
- Draft legislation and implementation priorities:
  - Draft legislation makes major steps to address regulatory gaps; prompt and strong implementation is now key.
  - Priorities include prudential rules that disincentivize systemic size and complexity, and steps to streamline systemic institutions that cannot be resolved under stress.
  - Financial Surveillance under the FSOC needs to quickly develop a common macroprudential focus, a culture of transparency, and cutting edge analysis.
  - Close coordination among regulatory agencies is crucial; the draft reform misses the opportunity to consolidate the overly complex array of U.S. financial regulators, leaving risks of gaps and duplication.
  - Improving transparency and containing counterparty risks in OTC derivatives markets is essential.
  - Steps are needed to revitalize private securitization.
  - Reforms to the housing finance system remain unfinished; clarifying the GSE’s status as public entities is useful. Over time, GSE mandates should be streamlined to bundling and guarantees.

### Monetary exit and Federal Reserve role
- The Fed is well placed to manage the uncertainty of the monetary exit.
- Its expanded toolkit should allow it to navigate uncertainties about the transmission mechanism and the efficacy of individual tools.
- The Fed has credibly communicated its commitment to sustaining appropriately accommodative monetary conditions while introducing tools to prepare for the later exit.
- Continued clear communication about strategy and operations will be essential as the exit evolves.

### Multilateral role and procedural note
- The United States has a key role to play in promoting a multilateral approach to economic policy management.
- Authorities’ leading role in multilateral fora and efforts to promote international stability are welcome.
- For the medium term, key U.S. contributions to global growth and stability are fiscal consolidation (to limit the external imbalance) and strengthening the financial sector.
- On trade policy, the U.S. authorities’ limited recourse to protectionist measures is welcome and they are encouraged to redouble efforts to conclude the Doha Round.
- Staff proposes to hold the next Article IV Consultation on a 12-month cycle.

*IMF Staff Report for the 2010 Article IV Consultation—Informational Annex (prepared by the Western Hemisphere Department, July 12, 2010).*

### Annex I. United States: Fund Relations

### Annex I. United States: Fund Relations (As of April 30, 2010)

### I. Membership and General Resources
- Joined 12/27/45; Article VIII.
- Quota: 37,149.30 SDR Million (100.00 percent).
- Fund holdings of currency: 29,579.52 SDR Million (79.62 percent).
- Reserve position in Fund: 7,568.63 SDR Million (20.37 percent).

### III. SDR Department
- Net cumulative allocation: 35,315.68 SDR Million (100.00 percent).
- Holdings: 36,881.95 SDR Million (104.44 percent).

### IV–VI. Purchases, Loans, Financial Arrangements, and Projected Obligations
- Outstanding Purchases and Loans: None.
- Financial Arrangements: None.
- Projected Obligations to Fund: None.

### VII. Exchange Rate Arrangements
- The exchange rate of the U.S. dollar floats independently and is determined freely in the foreign exchange market.

### VIII. Payments Restrictions and Sanctions
- The United States accepted Article VIII and maintains an exchange system free of restrictions and multiple currency practices with the exception of limited restrictions on certain payments and transfers imposed for security reasons.
- The United States currently administers approximately 30 economic sanctions programs, which restrict certain payments and transfers for transactions against particular foreign governments, entities, and individuals.
- Sanctions programs mentioned include those relating to: Burma, Cuba, Iran, North Korea, Sudan; and continues to block certain previously frozen assets of the former Yugoslavia.
- Several sanctions programs are “list-based” and affect only members of certain government regimes and other individuals and groups determined to threaten U.S. foreign policy or economy. Examples include programs relating to: Côte d’Ivoire, Liberia, Somalia, Syria, Western Balkans, and Zimbabwe.
- The United States also implements list-based sanctions programs against: narcotics traffickers; terrorism-related governments, entities, and individuals; and proliferators of weapons of mass destruction.

### IX. Article IV Consultation and Financial Sector Assessment
- 2009 Article IV consultation concluded in July 2009; Staff Report published as IMF Country Report 09/187.
- A fiscal ROSC was completed in the context of the 2003 consultation.
- An FSAP was conducted during the Fall of 2009 and Spring of 2010. The FSSA will be discussed at the board, together with the 2010 Article IV Consultation, on July 26, 2010.
- 2010 Article IV discussions were conducted from May 11–June 28. Concluding meetings with Chairman Bernanke and Treasury Secretary Geithner occurred on June 21 and 28. A press conference on the consultation was held on July 8, 2010.
- The mission team comprised: D. Robinson (Head), C. Kramer, M. Estevão, O. Celasun, A. Maechler, M. Sommer, N. Batini, E. Tsounta, G. Bin Li (all WHD); A. Bhatia, B. McDonald, Mika Saito (all SPR); F. Columba, J. Kiff (all MCM); J. Myers, S. Dawe (LEG). Ms. Lundsager (Executive Director) and Mr. Lin (Advisor) attended some meetings.
- Outreach included discussions with the private sector and think tanks.
- The authorities have agreed to the publication of the staff report.

*Italicized staff/board summary and assessment provided below are derived from subsequent Annexes and PINs in the source material.*

### Annex II — Statistical Issues and Data Dissemination
- Comprehensive economic data are available for the United States on a timely basis.
- The quality, coverage, periodicity, and timeliness of U.S. economic data are adequate for surveillance.
- Coverage of international capital flows in external sector statistics improved with June 2007 releases of BOP and IIP data on financial derivatives.
- The United States has subscribed to the Special Data Dissemination Standard (SDDS); metadata are posted on the Dissemination Standard Bulletin Board (DSBB).

United States: Table of Common Indicators Required for Surveillance (As of June 30, 2010) — selected items (Date of latest observation / Date received / Frequency of data / Frequency of reporting / Frequency of publication):
- Exchange rates: June 25 / June 28 / D / W / W
- International reserve assets and reserve liabilities of the monetary authorities: June 25 / June 30 / W / W / W
- Reserve/base money: June 23 / June 24 / B / W / W
- Broad money: June 16 / June 24 / W / W / W
- Central bank balance sheet: June 23 / June 24 / W / W / W
- Interest rates: same day / same day / D / D / D
- Consumer price index: May 2010 / Jun. 17 / M / M / M
- Revenue, expenditure, balance and composition of financing – general government: 2010 Q1 / Jun. 10 / Q / Q / Q
- Revenue, expenditure, balance and composition of financing – central government: May 2010 / June 10 / M / M / M
- Stocks of central government and central government-guaranteed debt: May 2010 / June 4 / M / M / M
- External current account balance: 2010 Q1 / June 17 / Q / Q / Q
- Exports and imports of goods and services: Apr. 2010 / June 10 / M / M / M
- GDP/GNP (3rd release): 2010 Q1 / June 25 / Q / M / M
- Gross External Debt: 2010 Q1 / June 17 / Q / Q / Q
- International Investment Position: 2009 / June 25 / A / A / A

(Notes in source: 1) Includes reserve assets pledged or otherwise encumbered as well as net derivative positions. 2) Both market-based and officially-determined rates. 3) Foreign, domestic bank, and domestic nonbank financing. 4) General government = central government + state and local governments. 5) Includes external gross financial asset and liability positions vis-à-vis nonresidents. 6) Frequency codes: Daily (D), Weekly (W), Biweekly (B), Monthly (M), Quarterly (Q), Annually (A).)

### Statement by IMF Staff Representative on the United States (July 22, 2010) — Key Stated Developments and Risks
- Incoming data since mid-June indicate a continued but subpar recovery, with downside risks to the staff’s forecast.
- First-quarter GDP growth was revised down by 0.5 percent (saar), mainly owing to weaker final demand.
- Recent data indicate: softening consumer confidence; dwindling tailwinds from the inventory cycle; weak private sector employment growth; reduced housing activity on expiry of the homebuyer tax credit.
- Imports picked up strongly relative to exports in June; may reflect temporary factors such as expiry of an export VAT rebate in China.
- Activity in Q2 2010 has been weaker than expected, with GDP growth in Q2 tracking below the WEO estimate.
- On fiscal policy, the Senate approved another temporary extension of unemployment benefits; authorities planned to unveil mid-session budget update on Friday, July 23.
- Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 cleared to be signed; most major provisions align with U.S. FSAP recommendations.
- The U.S. regulatory system remains complex; effectiveness of reform will hinge on implementation.
- Financial conditions driven by risk aversion: stock prices below end-2009 levels; dollar elevated relative to start of year; Treasury yields declined on flight to quality.
- Consumer credit fell in June; Fed survey recorded easier credit terms though still tighter than end-2006.
- Q2 earnings for financial institutions largely disappointing (meager trading revenues, continued high albeit easing credit costs).

### Public Information Notice (PIN) No. 10/101 — Executive Board Concluding Statement (July 30, 2010)
Background and recent developments:
- Massive policy response aided recovery: monetary policy highly accommodative; policy rates near zero; asset purchases helped ameliorate financial strains.
- Fiscal policy very stimulative; the American Recovery and Reinvestment Act imparted stimulus of about 5 percent of GDP during 2009–2011, supplemented by targeted measures to housing, labor and auto markets.
- Measures to stabilize financial markets (capital injections, guarantees, stress testing) improved financial conditions.
- GDP grew an average 4 percent (seasonally adjusted annual rate) in H2 2009 before slowing to 2.7 percent (saar) in Q1 2010.
- U.S. current account deficit shrank due to weak domestic demand, lower oil prices, and cumulative effect of dollar depreciation since early 2002.

Board assessment and policy guidance:
- Recovery slow by historical standards; outlook uncertain with downside risks (including double dip in housing and spillovers from external financial conditions).
- Macroeconomic policies to remain accommodative in near term. Draft FY2011 budget includes further targeted support for growth while proposing deficit reduction to 4 percent of GDP by middle of the decade.
- A new Fiscal Commission will recommend measures to reduce the deficit to roughly 3 percent of GDP and stabilize debt-to-GDP over medium term.
- Most special liquidity facilities phased out; Fed ended mortgage-backed securities purchase program without disrupting markets and signaled continued low policy rates for an extended period.
- Progress on long-term challenges: health care reform widens coverage and introduces cost-containment measures intended to reduce near-term deficits and long-term fiscal gap; financial regulation reform broadly consistent with FSAP.

Executive Directors’ views (summarized):
- Near-term support appropriate given weak demand and high unemployment; envisioned withdrawal in 2011 appropriate.
- Monetary support can be sustained longer given quiescent inflation expectations and forthcoming fiscal drag.
- Scope for smaller up-front fiscal adjustment if downside risks materialize, complemented by measures to bolster medium-term credibility.
- Setting public debt on a sustainable path is a key macroeconomic challenge; larger-than-budgeted adjustment would be required to stabilize debt-to-GDP under staff assumptions, requiring revenue and expenditure measures.
- Urged authorities to accompany 2011 adjustment with strong commitment to medium-term stabilization, possibly including further entitlement reform.
- Welcomed health care reform but emphasized need for close monitoring of costs and remedial actions if needed.
- Welcomed FSAP assessment; financial system has strengthened but remains vulnerable; private securitization impaired; banks may lack balance-sheet strength to support future credit demand.
- Welcomed major financial reform but stressed strong implementation and close coordination among regulatory agencies; noted missed opportunity to consolidate complex array of regulators.
- Underscored importance of containing counterparty risks in OTC derivatives; revitalizing private securitization; moving ahead with reforms to housing finance system, including GSEs.
- Saw Federal Reserve as well placed to manage monetary exit given expanded toolkit; emphasized continued clear communication.
- Saw key U.S. role in promoting multilateral economic management via medium-term fiscal consolidation and strengthening financial sector; welcomed limited recourse to protectionist measures and encouraged redoubling efforts to conclude the Doha round.

### United States: Selected Economic Indicators (annual change in percent, unless otherwise indicated) — Projections and Historical Series (selected rows)
National production and income (annual change):
- Real GDP: 2005: 3.1; 2006: 2.7; 2007: 2.1; 2008: 0.4; 2009: -2.4; 2010: 3.3; 2011: 2.9
- Net exports 1/: 2005: -0.3; 2006: -0.1; 2007: 0.6; 2008: 1.2; 2009: 1.2; 2010: -0.3; 2011: -0.5
- Total domestic demand: 2005: 3.2; 2006: 2.6; 2007: 1.4; 2008: -0.7; 2009: -3.4; 2010: 3.5; 2011: 3.3
- Final domestic demand: 2005: 3.3; 2006: 2.5; 2007: 1.7; 2008: -0.4; 2009: -2.7; 2010: 2.1; 2011: 3.0
- Private final consumption: 2005: 3.4; 2006: 2.9; 2007: 2.7; 2008: -0.2; 2009: -0.6; 2010: 2.3; 2011: 2.1
- Public consumption expenditure: 2005: 0.6; 2006: 1.0; 2007: 1.4; 2008: 3.0; 2009: 1.8; 2010: 0.8; 2011: -2.0
- Gross fixed domestic investment: 2005: 5.3; 2006: 2.5; 2007: -1.2; 2008: -3.6; 2009: -14.5; 2010: 2.8; 2011: 12.3
- Private fixed investment: 2005: 6.5; 2006: 2.3; 2007: -2.1; 2008: -5.1; 2009: -18.3; 2010: 3.1; 2011: 15.0
- Residential structures: 2005: 6.2; 2006: -7.3; 2007: -18.5; 2008: -22.9; 2009: -20.5; 2010: 0.7; 2011: 19.9
- Public fixed investment: 2005: -0.8; 2006: 3.3; 2007: 3.2; 2008: 3.4; 2009: 1.9; 2010: 1.7; 2011: 3.0
- Change in private inventories 1/: 2005: -0.1; 2006: 0.1; 2007: -0.3; 2008: -0.4; 2009: -0.9; 2010: 1.3; 2011: 0.3
- GDP in current prices: 2005: 6.5; 2006: 6.0; 2007: 5.1; 2008: 2.6; 2009: -1.3; 2010: 4.1; 2011: 4.1

Employment and inflation:
- Unemployment rate: 2005: 5.1; 2006: 4.6; 2007: 4.6; 2008: 5.8; 2009: 9.3; 2010: 9.7; 2011: 9.2
- CPI inflation: 2005: 3.4; 2006: 3.2; 2007: 2.9; 2008: 3.8; 2009: -0.3; 2010: 1.6; 2011: 1.1
- GDP deflator: 2005: 3.3; 2006: 3.3; 2007: 2.9; 2008: 2.1; 2009: 1.2; 2010: 0.8; 2011: 1.2

Government finances:
- Federal balance (percent of GDP), fiscal years: 2005: -2.6; 2006: -1.9; 2007: -1.2; 2008: -3.2; 2009: -11.3; 2010: -11.0; 2011: -8.1
- Debt held by the public (percent of GDP): 2005: 36.9; 2006: 36.5; 2007: 36.2; 2008: 40.2; 2009: 53.0; 2010: 64.0; 2011: 69.0
- General government (GFSM 2001, calendar years) Net lending (percent of GDP): 2005: -3.2; 2006: -2.0; 2007: -2.7; 2008: -6.6; 2009: -12.5; 2010: -10.7; 2011: -8.0
- Structural balance (percent of potential nominal GDP): 2005: -2.3; 2006: -1.9; 2007: -2.3; 2008: -4.7; 2009: -7.1; 2010: -8.0; 2011: -6.2
- Gross debt (percent of GDP): 2005: 61.6; 2006: 61.1; 2007: 62.1; 2008: 70.6; 2009: 83.2; 2010: 92.1; 2011: 97.2

Interest rates (percent):
- Three-month Treasury bill rate: 2005: 3.2; 2006: 4.8; 2007: 4.5; 2008: 1.4; 2009: 0.2; 2010: 0.1; 2011: 0.3
- Ten-year government bond rate: 2005: 4.3; 2006: 4.8; 2007: 4.6; 2008: 3.7; 2009: 3.3; 2010: 3.6; 2011: 4.7

Balance of payments:
- Current account balance (billions of dollars): 2005: -748; 2006: -803; 2007: -718; 2008: -669; 2009: -378; 2010: -482; 2011: -531
- Current account balance (percent of GDP): 2005: -5.9; 2006: -6.0; 2007: -5.1; 2008: -4.6; 2009: -2.7; 2010: -3.2; 2011: -3.4
- Merchandise trade balance (billions of dollars): 2005: -784; 2006: -839; 2007: -823; 2008: -835; 2009: -507; 2010: -651; 2011: -735
- Merchandise trade balance (percent of GDP): 2005: -6.2; 2006: -6.3; 2007: -5.8; 2008: -5.8; 2009: -3.6; 2010: -4.4; 2011: -4.8
- Balance on invisibles (billions of dollars): 2005: 36; 2006: 37; 2007: 105; 2008: 166; 2009: 129; 2010: 168; 2011: 204
- Balance on invisibles (percent of GDP): 2005: 0.3; 2006: 0.3; 2007: 0.7; 2008: 1.1; 2009: 0.9; 2010: 1.1; 2011: 1.3

Saving and investment (percent of GDP):
- Gross national saving: 2005: 15.1; 2006: 16.2; 2007: 14.5; 2008: 12.6; 2009: 10.8; 2010: 12.5; 2011: 14.2
- Gross domestic investment: 2005: 20.3; 2006: 20.5; 2007: 19.5; 2008: 18.2; 2009: 15.0; 2010: 16.0; 2011: 17.6

Sources: Haver Analytics and IMF staff estimates. (1/ Contribution to real GDP growth, percentage points.)

*Italic: Annex I. United States: Fund Relations (As of April 30, 2010), and associated Annexes, staff statements, and Public Information Notice as contained in the source PDF.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10249.pdf_