IMF Executive Board Concludes Article IV Consultation with the United States

IMF News, July 3, 2018

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Published: July 3, 2018

Near-term outlook and growth

On June 29, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the United States.
The near-term outlook for the U.S. economy is one of strong growth and job creation.
Unemployment is near levels not seen in 50 years, and growth is set to accelerate, aided by a fiscal stimulus, a recovery of private investment, and supportive financial conditions.
These positive outturns have been supported, and been reinforced by, a favorable external environment.
The balance of evidence suggests that the U.S. economy is beyond full employment.

Inflation, wages, and labor markets

A slow but steady rise in wage and price inflation is expected as labor and product markets tighten.
Core PCE inflation is expected to rise modestly above 2 percent by mid-year.
Wages have been growing broadly in line with (relatively weak) labor productivity growth, leaving unit labor costs virtually unchanged over the past 2 years.
In the next several months, wages and unit labor costs are anticipated to increase at a modest pace.

Vulnerabilities and risks

The planned expansion in the federal deficit at this stage of the cycle could trigger a faster-than-expected rise in inflation.
A faster rise in inflation would be accompanied by a more rapid rise in interest rates that could increase market volatility both in the U.S. and abroad.
There is a risk of a marked reversal of capital flows, particularly from emerging markets with weaker macroeconomic fundamentals.
U.S. budget and tax policy choices will exacerbate an already unsustainable upward dynamic in the public debt and leave few budget resources available to invest in a range of urgently needed supply-side reforms, including infrastructure spending.
These choices will also contribute to a rise in global imbalances.
These risks are added to by recent actions by the U.S. to impose tariffs on imports.

Policy focus of the consultation

The consultation focused on the policies needed to:
- address these risks,
- rebuild fiscal space,
- preserve financial stability,
- support low- and middle-income households,
- incentivize work,
- and raise medium-term living standards.

Executive Board Assessment

Directors welcomed the strong performance of the U.S. economy, with accelerating growth, low unemployment, and muted inflation.
Directors welcomed the favorable near‑term outlook and the prospect of marking the longest economic expansion in its recorded history.
Directors observed heightened policy uncertainty and medium‑term vulnerabilities, including rising public debt, trade tensions, and income inequality.
Directors stressed that developments and policy actions in the United States have significant implications for the rest of the world, and encouraged the authorities to take that consideration into account in their policy decisions.
On fiscal strategy and tax reform:
- Directors recognized the objectives of the fiscal strategy and tax reform, with its many positive features, in supporting growth and promoting structural changes to unleash the economic potential.
- At the current stage of the business cycle, the expansionary fiscal policy stance, while boosting U.S. and global output in the near term, could increase risks and uncertainties in the medium term.
- Directors cautioned that the procyclicality of the budget and tax policy plans would adversely affect the fiscal deficit, debt sustainability, and global imbalances.
- Directors encouraged the authorities to rebalance fiscal policy, increase the revenue‑to‑GDP ratio through a greater reliance on indirect taxes, and prioritize infrastructure spending.
- Directors saw scope for targeting personal income tax relief at lower‑income households, and improving the compliance of tax provisions with the international obligations.
On monetary policy:
- Directors commended the Federal Reserve for pursuing monetary policy normalization in a gradual, data‑dependent, and well‑communicated manner.
- They stressed the importance of continued adherence to these principles, while being mindful of potential global spillovers as monetary policy tightens.
- Directors concurred that, given the sizable fiscal stimulus, achieving the dual mandate of maximum employment and price stability would likely require a faster pace of policy rate increases.
- They pointed to an inflation surprise as an important risk that, if realized, could create volatility in financial markets, with negative global consequences.
On trade policy:
- Directors raised significant concerns over recent trade policy proposals that could have damaging effects beyond the U.S. economy, trigger retaliatory responses, and undermine the open, fair, rules‑based multilateral trading system.
- Directors urged the authorities to work constructively together with their trading partners to reduce trade barriers and resolve trade and investment disagreements without resorting to harmful unilateral actions.
On financial stability and regulation:
- Directors noted medium‑term risks to financial stability, including those related to high equity market valuations, rising leverage, weakened underwriting standards, and cyber risks.
- Managing these risks would require high‑quality and independent supervision.
- Directors stressed the need to preserve the current risk‑based approach to regulation, supervision, and resolution; strengthen the oversight of nonbank financial institutions; and remain committed to agreed international standards.
- They looked forward to further progress in implementing the remaining recommendations of the 2015 FSAP.

United States: Selected Economic Indicators (percentage change from previous period, unless otherwise indicated)

Projections for Real GDP:
- 2017: 2.3
- 2018: 2.9
- 2019: 2.7
- 2020: 1.9
- 2021: 1.7
- 2022: 1.5
- 2023: 1.4
Net exports (contribution to real GDP growth, percentage points) 1/:
- 2017: -0.2
- 2018: -0.4
- 2019: -0.6
- 2020: -0.5
- 2021: 0.0
- 2022: -0.1
Total domestic demand:
- 2017: 2.4
- 2018: 3.3
- 2019: 3.2
- 2020: 1.6
- 2021: 1.3
Private final consumption:
- 2017: 2.8
- 2018: 2.5
- 2019: 2.1
Public consumption expenditure:
- 2017: 0.1
- 2018: 3.0
- 2019: -0.3
Gross fixed domestic investment:
- 2017: 3.4
- 2018: 5.7
- 2019: 6.0
- 2020: 4.3
- 2021: 0.8
- 2022: 0.7
Private fixed investment:
- 2017: 4.0
- 2018: 6.3
- 2019: 6.9
- 2020: 4.6
- 2021: 1.0
- 2022: 0.4
- 2023: 0.2
Public fixed investment:
- 2017: 2.6
- 2018: 3.1
Nominal GDP:
- 2017: 4.1
- 2018: 5.4
- 2019: 5.6
- 2020: 3.8
- 2021: 3.7
- 2022: 3.5
Personal saving rate (% of disposable income):
- 2017: 16.6
- 2018: 17.2
- 2019: 17.7
- 2020: 18.1
- 2021: 18.0
- 2022: 17.8
- 2023: 17.6
Private investment rate (% of GDP):
- 2017: (value not provided in source)
Unemployment and potential output:
- Unemployment rate:
- 2017: 4.4
- 2018: 3.6
- Labor force participation rate:
- 2017: 62.8
- 2018: 62.6
- 2019: 62.4
- 2020: 62.2
- 2021: 62.0
- 2022: 61.8
- Potential GDP:
- 2017: 1.8
- 2018: 2.0
- Output gap (% of potential GDP):
- 2017: 0.3
- 2018: 1.2
Inflation:
- CPI inflation (q4/q4):
- 2017: 2.2
- Core CPI Inflation (q4/q4):
- (value not provided in source)
- PCE Inflation (q4/q4):
- (value not provided in source)
- Core PCE Inflation (q4/q4):
- (value not provided in source)
- GDP deflator:
- (value not provided in source)
Government finances:
- Federal government:
- Federal balance (% of GDP) 2/:
- 2017: -3.5
- 2018: -4.1
- 2019: -4.6
- 2020: -4.5
- 2021: -4.7
- 2022: -5.0
- 2023: -4.8
- Federal debt held by the public (% of GDP):
- 2017: 76.5
- 2018: 76.9
- 2019: 77.2
- 2020: 78.5
- 2021: 80.5
- 2022: 82.5
- 2023: 84.6
- General government:
- Primary structural balance (% of potential GDP):
- 2017: -2.7
- 2018: -3.8
- 2019: -3.3
- 2020: -3.2
- 2021: -3.0
- 2022: -2.3
- General government budget balance (% of GDP) 2/:
- 2017: -5.3
- 2018: -5.5
- 2019: -5.4
- 2020: -4.9
- General government gross debt (% of GDP):
- 2017: 105.6
- 2018: 106.0
- 2019: 106.5
- 2020: 108.1
- 2021: 109.9
- 2022: 111.6
- 2023: 113.1
Interest rates (percent; period average):
- Fed funds rate:
- (value not provided in source)
- Three-month Treasury bill rate:
- 2017: 0.9
- Ten-year government bond rate:
- (value not provided in source)
Balance of payments:
- Current account balance (% of GDP):
- 2017: -2.4
- 2018: -3.6
- 2019: -3.4
- Merchandise trade balance (% of GDP):
- 2017: -4.2
- 2018: -5.2
- 2019: -5.1
- Export volume (NIPA basis, goods):
- 2017: 4.5
- 2018: 5.2
- Import volume (NIPA basis, goods):
- 2017: 7.2
- 2018: 7.0
- 2019: 5.9
- Net international investment position (% of GDP):
- 2017: -40.5
- 2018: -41.4
- 2019: -42.5
- 2020: -44.4
- 2021: -46.2
- 2022: -47.8
- 2023: -49.2
Saving and investment (% of GDP):
- Gross national saving:
- 2017: 17.5
- 2018: 17.3
- 2019: -1.6
- 2020: -4.0
- 2021: -3.7
- Private:
- 2017: 19.0
- 2018: 21.0
- 2019: 21.7
- 2020: 21.6
- 2021: 21.5
- 2022: 21.1
- Personal:
- 2017: 16.5
- 2018: 19.1
- 2019: 19.9
- 2020: 19.6
- 2021: 19.5
- 2022: 18.3
- Gross domestic investment:
- 2017: 19.8
- 2018: 20.4
- 2019: 20.8
- 2020: 21.2
- 2021: 20.9
- 2022: 20.4
- Public:
- (value not provided in source)

Sources: BEA; BLS; FRB; Haver Analytics; and IMF staff estimates. 1/ Contribution to real GDP growth, percentage points. 2/ Includes staff's adjustments for one-off items, including costs of financial sector support.

IMF Communications Department — Press Release No. 18/274, July 3, 2018.