United States of America: Staff Concluding Statement of the 2024 Article IV Mission
IMF News, June 27, 2024
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- Published: June 27, 2024
Key takeaways
- The U.S. economy is "robust, dynamic, and adaptable to changing global conditions."
- Activity and employment continue to exceed expectations relative to the 2023 Article IV consultation.
- Disinflation has been "considerably less costly than many had feared," but the fiscal deficit remains "too large," driving a sustained upward trajectory for the public debt-GDP ratio.
- Ongoing expansion of trade restrictions and insufficient progress in addressing vulnerabilities from the 2023 bank failures pose important downside risks.
A Dynamic Economy — findings
- Hysteresis effects from the pandemic did not materialize; activity and employment exceed pre-pandemic expectations.
- Real incomes, after being diminished by the unexpected rise in inflation in 2022, have risen above pre-pandemic levels.
- Job growth: "16 million new jobs created since end-2020."
- Income and wealth gains have been uneven; poverty remains high following expiration of pandemic-era support.
- Outlook supported by:
- A significant rise in household wealth; homeowners benefited from an "almost 50 percent increase in the average house price since end-2019."
- Household and corporate debt service burden insulated from market interest rate increases: "net interest payments by nonfinancial corporates fell" and "net interest outlays by households saw only a modest increase."
- A material improvement in the terms of trade driven by net exports of natural gas, crude oil, and petroleum products.
- Large and ongoing supply gains from migrant inflows (expanding the workforce by "almost 3 percent over the past three years"), increased participation by native-born workers (particularly female, black and Hispanic workers), and rising labor productivity.
- Near-term distribution of activity risks assessed as "broadly balanced":
- Upside: consumption and investment could exceed expectations due to a healthy labor market, rising real incomes, and wealth gains; persistent supply-side gains from higher productivity and foreign labor inflows.
- Downside: complex global geopolitical environment or slower disinflation leading to a higher path for interest rates.
Progress in Disinflation — findings and risks
- PCE inflation peaked at "7.1 percent in mid-2022."
- The Federal Reserve raised the policy rate by "525bps."
- PCE inflation was "2.7 percent in April" and is expected to return to "2 percent by mid-2025."
- Upside risks to inflation:
- Shelter inflation may decline more slowly or reverse.
- Nominal wage growth remains relatively high, which could slow softening of non-shelter services inflation.
- Escalation of geopolitical tensions (e.g., Middle East conflict or war in Ukraine) could raise energy costs and pass through to wages and core inflation.
Monetary Policy — guidance and considerations
- Recommendation: The Federal Reserve should "wait to reduce its policy rate until at least late 2024."
- Rationale:
- The economy is "humming along" and the current monetary stance has not imposed high costs in terms of growth or employment.
- There is significant room for maneuver within the Fed’s mandate of price stability and maximum employment.
- Given upside inflation risks, lower the policy rate only after clearer evidence of sustained return to the FOMC’s "2 percent goal."
- If incoming inflation data runs hot, consider removing the loosening bias in Fed communications and potentially further raising the federal funds rate.
- Communications: Continue to clearly communicate the FOMC’s interpretation of incoming data and adjust forward guidance to ensure smooth absorption of stance shifts.
- Balance sheet: The decision to reduce the pace of run-off of the Fed’s holdings of Treasuries will provide time to judge the appropriate long-term size of the Fed’s balance sheet; decisions on stopping the shrinking should avoid inducing volatility in short-term funding markets.
Fiscal Policy — diagnosis and recommendations
- Diagnosis:
- "Pressing need to reverse the ongoing increase in public debt-GDP ratio."
- Under current policies, "general government debt is expected to rise steadily and exceed 140 percent of GDP by 2032."
- General government deficit expected to remain "around 2½ percent of GDP above the levels forecast at the time of the 2019 Article IV consultation."
- High deficits and debt create risks: higher fiscal financing costs and risks to smooth rollover of maturing obligations.
- Required adjustment:
- To put debt-GDP on a clear downward trajectory, a frontloaded fiscal adjustment is needed to shift to a "general government primary surplus of around 1 percent of GDP (an adjustment of around 4 percent of GDP relative to the current baseline)."
- Policy options and priorities:
- Options include raising indirect taxes, progressively increasing income taxes (including for those earning less than "US$400,000 per year"), eliminating a range of tax expenditures, and reforming entitlement programs.
- Policies must go beyond efficiencies in discretionary, non-defense federal spending.
- Some fiscal savings should be deployed to increase spending on poverty alleviation:
- Reinstating a more generous, refundable Child Tax Credit targeted to lower income households.
- Raising the income threshold for eligibility for the Earned Income Tax Credit for workers without children.
- Fiscal institutions:
- Address shortcomings that lead to political stand-offs over the debt limit and funding lapses.
- Institutional changes suggested:
- Ensure that once appropriations are approved, the corresponding space is automatically added to the debt ceiling.
- Where funding lapses occur, automatically fund the federal government at some fraction of previous year’s funding until a full-year appropriations bill can be signed into law.
Overall macro assessment
- "The U.S. economy has largely returned to balance."
- Labor market imbalances mostly resolved; economy appearing to operate "slightly above maximum employment."
- By mid-2025, inflation expected to return to the FOMC’s "2 percent goal" allowing policy rate to return to a neutral setting.
- External position assessed to be "broadly in line with the level implied by medium term fundamentals and desirable policies."
- Persistent concern: fiscal deficit "much too large" and public debt "well above prudent levels."
Risks — Financial system
- Financial stability risks diminished since 2023 Article IV consultation and some critical reforms are being implemented (e.g., measures to strengthen Treasury market functioning and insulate money market funds).
- Remaining gaps: insufficient mitigation of banking system vulnerabilities revealed in 2023, including failings in bank supervision, the large share of uninsured deposits, and risks from 2018 regulatory "tailoring."
- Recommendations:
- Fully implement the final components of the Basel III agreement.
- Apply similar regulatory requirements to all banks with "US$100 billion or more in assets" (including supervisory stress tests).
- Further strengthen supervisory oversight and practices.
- Re-examine the coverage of deposit insurance.
- Recalibrate bank liquidity requirements and liquidity stress tests to account for fast-moving deposit outflows and potential losses when long-duration assets are liquidated.
- Increase resilience of nonbank mortgage companies, given their role in servicing a sizable share of U.S. mortgages.
Risks — Trade
- Ongoing intensification of trade restrictions and increased use of preferences between domestic and foreign commercial interests are growing downside risks.
- Policy recommendations:
- Actively engage with major trading partners to address core issues: unfair trade practices, supply chain fragilities, and national security concerns.
- Avoid tariffs, nontariff barriers, and domestic content provisions, which distort trade and investment, risk fragmenting global supply chains, and spur retaliatory actions.
- Unwind obstacles to free trade and bolster competitiveness through investments in worker training, apprenticeships, and infrastructure.
- Engage fully with efforts to strengthen the WTO, including restoration of a well-functioning dispute settlement system by "end-2024," find common ground on tariffs, farm and industrial subsidies, and services trade, and conclude new WTO-based market-opening agreements.
- Confine industrial policies to specific objectives where market failures exist; minimize trade and investment distortions, be consistent with international obligations, and avoid discriminating between domestic and overseas producers.
Selected economic indicators and projections (as presented)
- Real GDP (annual growth):
- 2022: 1.9
- 2023: 2.5
- 2024: 2.6
- 2025: 2.0
- 2026: 2.1
- 2027: (not provided in table for annual growth)
- Real GDP (q4/q4):
- 2022: 0.7
- 2023: 3.1
- 2024: 1.8
- Output gap (% of potential GDP):
- 2022: 0.4
- 2023: 0.6
- 2024: 0.2
- 2025: -0.2
- 2026: -0.1
- Unemployment rate (q4 average):
- 2022: 3.6
- 2023: 3.7
- 2024: 4.2
- 2025: 4.3
- 2026: 4.0
- 2027: 3.9
- Current account balance (% of GDP):
- 2022: -3.8
- 2023: -3.0
- 2024: -2.9
- 2025: -2.8
- 2026: -2.5
- 2027: -2.2
- 2028: -1.9
- 2029: -1.6
- Federal funds rate (end of period):
- 2022: 4.4
- 2023: 5.4
- 2024: 5.1
- 2025: 4.1
- 2026: 2.9
- Ten-year government bond rate (q4 avg.):
- 2022: 3.8
- 2023: 3.5
- 2024: 3.3
- 2025: 3.2
- PCE inflation (q4/q4):
- 2022: 5.9
- 2023: 2.8
- 2024: 2.4
- Federal government fiscal balance (% of GDP):
- 2022: -5.4
- 2023: -6.3
- 2024: -6.8
- 2025: -6.6
- 2026: -6.1
- 2027: -5.6
- 2028: -5.3
- Federal government debt held by the public (% of GDP):
- 2022: 95.8
- 2023: 97.3
- 2024: 99.2
- 2025: 102.1
- 2026: 104.7
- 2027: 106.3
- 2028: 108.1
- 2029: 109.5
- General government fiscal balance (% of GDP):
- 2022: -4.1
- 2023: -7.6
- 2024: -7.8
- 2025: -7.2
- 2026: -6.7
- 2027: -6.5
- General government gross debt (% of GDP):
- 2022: 119.8
- 2023: 120.7
- 2024: 123.2
- 2025: 126.7
- 2026: 129.6
- 2027: 131.8
- 2028: 134.0
- 2029: 135.9
IMF staff concluding statement of the 2024 Article IV mission for the United States of America (June 27, 2024).