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United States of America: Staff Concluding Statement of the 2019 Article IV Mission

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Via IMF (Den Internationale Valutafond)

United States of America: Staff Concluding Statement of the 2019 Article IV Mission







June 6, 2019







A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.









The IMF staff team shared the 2019 Article IV concluding statement
with the United States (U.S.) authorities on May 20, 2019.

A Positive Near-Term Outlook

1. In July the U.S. economy will have achieved the longest
expansion in recorded U.S. history

. Since June 2009 the economy has repaired the damage wrought by
the financial crisis and demonstrated extraordinary resilience,
enduring both domestic policy tightening (in 2011-15 there was a
cumulative 5¼ percent of GDP withdrawal of fiscal stimulus) and a
range of external shocks. Unemployment has been on a downward trend
for almost a decade and is now at levels not seen in 50 years. Over
the course of this expansion an average of 2 million jobs per year
have, on net, been created. Real wages are rising, including
notably for those at the lower end of the income distribution, and
productivity growth appears to be recovering. Against this
backdrop, inflationary pressures remain remarkably subdued. The
U.S. external position is judged to be moderately weaker than
implied by medium-term fundamentals and desirable policies.


2.  Real GDP is expected to grow at an annual rate of 2.6 percent
this year, before moderating to around 2 percent in 2020.

A fiscal expansion put in place in 2017-18—with tax reductions and
an increase in both defense and nondefense spending—has helped
bring annual growth to 2.9 percent in 2018. However, as the effects
of this fiscal impulse fade over the next few years, growth will
gravitate back toward potential (of around 1¾ percent). Risks are
viewed to be broadly balanced around this forecast. A deepening of
ongoing trade disputes or an abrupt reversal of the recent
ebullient financial market conditions represent material risks to
the U.S. economy (with concomitant negative outward spillovers).
These risks are interconnected with trade policy uncertainty an
important factor for both domestic and global financial conditions
as well as for business investment decisions. On the other hand, a
Congressional agreement that raises budget spending caps or a
positive resolution of trade tensions could provide a supportive
tailwind to activity.

But Accompanied by Troubling Social Indicators

3. Despite these positive macroeconomic outcomes, the benefits
from this decade-long expansion have not been widely shared

. Real GDP per capita is at an all-time high but a broader set of
social indicators shows a more sobering picture.

  • Life expectancy is declining and is well below that of other G7
    countries (despite having been near the G7 median in the 1980s).
    Rising suicide rates and deaths linked to drug overdoses (

    Case and Deaton 2017

    ) have contributed to this diminished longevity.
  • The income of the median U.S. household, in inflation-adjusted
    terms, is only 2.2 percent higher today than it was at the end
    of the 1990s.

    This is despite real per capita GDP being 23 percent higher over
    the same period.

  • The wealth and income distribution are increasingly polarized. The
    poorest 40 percent of households have a level of net wealth that is
    lower today than it was in 1983 (see Wolff 2017) and a
    growing share of the population earn less than one-half of the
    median income (see

    Alichi et al. 2017

    ).
  • The poverty rate remains close to the level that it was immediately
    before the financial crisis. According to the latest

    supplemental poverty measure

    , almost 45 million Americans are living in poverty.

  • Socioeconomic mobility has steadily eroded. As just one indicator
    of declining mobility (see

    Chetty et al. 2016

    ), one-half of the current cohort of young adults earns less than
    their parents did at a similar age (40 years ago, only 10 percent
    of young adults were in such a position).

  • Despite spending a high share of GDP on education (relative to OECD
    peers), education outcomes have been disappointing. U.S. high
    school students consistently score below most other G-7 countries
    in internationally comparable math and reading tests; a high
    noncompletion rate for colleges results in less than one-half of
    25‑34 year‑olds having an undergraduate degree (see

    OECD 2018

    ); and the rapid rise in the cost of college education has led to a
    significant overhang of student debt.
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4. Addressing the growing divergences between the aggregate
fortunes of the real economy and the standard of living for the
bulk of the U.S. population is complex and will require action
on many fronts

. Policies that could be considered include: instituting
comprehensive paid family leave; providing means-tested assistance
to families to help defray child and dependent care expenses;
expanding eligibility and increasing the generosity of the Earned
Income Tax Credit (EITC); increasing the federal minimum wage; and
simplifying and increasing the generosity of social assistance
programs while avoiding “cliffs” in the phase out of social
benefits as disposable income rises. Continued efforts are needed
to expand health care coverage, particularly for those at the lower
end of the income distribution, while containing health care cost
inflation. It will be important to capitalize on the range of
experiences at the state and local level to expand, and fund,
programs that have demonstrated results in countering the upswing
in opioid addiction and related deaths. The Federal government
could better prioritize its spending on education to incentivize
increased resources for early childhood education, universal pre-K,
science, technology, engineering and mathematics programs,
apprenticeships and vocational education, and programs that improve
preparedness and retention at the college level. Finally,
reconsidering the funding model for public schools could help
reduce disparities, especially if such changes put more resources
in schools with a higher concentration of students from low-income
households. Some of these measures will imply higher fiscal costs
which will need to be offset both by tackling entitlement spending
and raising revenues (see below). However, addressing these
troubling social outcomes will help strengthen human capital,
increase labor force participation, boost productivity, support
aggregate demand and raise medium-term growth.

Fiscal Imbalances Need to Be Addressed

5. The U.S. public debt is on an unsustainable path.
The administration’s fiscal expansion has supported economic
activity at a time when the global economic expansion was
weakening. Nonetheless, this has come at the cost of a continued
increase in the debt-to-GDP ratio (now at 78 percent of GDP for the
federal government and 107 percent of GDP for the general
government). Policy adjustments are needed to steadily reverse the
increase in the fiscal deficit and to put the public debt on a
downward path. There are a range of possible policy options to
choose from but, as has been discussed in past consultations, any
successful package will require steps to address the expected
increases in entitlement spending on health and social security and
to raise indirect taxes. Undertaking supply-side measures that
sustainably raise potential growth would reduce the size of the
policy adjustment needed to achieve fiscal sustainability and
increase productivity. For example, legislating a skills-based
immigration reform could both increase productivity and the size of
the labor force as well as lessen the pressures from aging, with
beneficial consequences for the debt-to-GDP dynamics. Similarly,
other long-standing recommendations could help raise potential
output including upgrading public infrastructure and further
simplifying and harmonizing a range of regulations within the
Federal government and across states.


6. The prolonged government shutdown earlier this year
demonstrates, once again, the dysfunction inherent in the U.S.
budgetary process

. Such policy-induced uncertainty is not good for the U.S. economy
and has negative outward spillovers for the rest of the global
economy. It will be important, therefore, to find institutional
mechanisms to avoid such self-inflicted wounds that are created by
political brinkmanship over appropriations and the debt ceiling.

Monetary Policy Has Appropriately Paused


7. Further increases in the policy rate should be deferred until
there are greater signs of wage or price inflation than are
currently evident.

Faced with falling inflation, anchored inflation expectations, a
flat trade-off between inflation and slack, and continued
uncertainties around the global outlook, the balance of risks argue
in favor of a pause to further changes in monetary policy. Such a
pause will give policymakers time to gauge the balance of risks to
both inflation and employment outcomes and to build a clearer
picture of whether further adjustments in the federal funds rate
are warranted. It may also allow for some temporary overshooting of
the Federal Reserve’s inflation goal (so that inflation approaches
the Fed’s 2 percent medium-term target from above). Finally, it is
possible that continued policy accommodation could generate
lasting, positive supply-side effects as scarce labor resources are
allocated more efficiently and as labor force participation
increases.

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8. The Fed’s continued adherence to the principles of data
dependence and clear, forward-looking communication will be
vital to avoid creating volatility in financial conditions or
negative spillovers to the rest of the world

. To assist in this communication effort, the Fed could consider
publishing a quarterly monetary policy report that details a
central economic scenario that is endorsed by the FOMC (with a
quantification of how FOMC members see the distribution of risks
around that scenario).


9. The Federal Reserve’s ongoing review of its monetary policy
strategy, tools and communications is a timely effort to assess
how the Fed can best continue to meet its dual mandate.

There is a growing consensus that the decline in various estimates
of the neutral interest rate in recent decades has increased the
likelihood that monetary policy will be constrained by the lower
effective bound in future recessions. In addition, despite the Fed
pursuing a symmetric target, personal consumption expenditures
inflation has been stubbornly below the Fed’s medium‑term target
for much of the past decade. The Fed’s ongoing assessment of
alternative strategies for meeting its dual mandate will,
therefore, be invaluable in helping to inform the formulation of
policies and to ensure the continuing credibility of the Fed’s
clear commitment to its mandate of maximum employment and stable
prices.


10. Beyond possible changes to the policy strategy, providing
greater clarity and a more holistic picture of the expected
evolution of the operating framework for monetary policy would
be valuable.

Operational changes could involve introducing a standing repo
facility (to help cap spikes in money market rates); moving away
from the federal funds rate as the operating target; and returning
to a point target for the policy rate (rather than the current
target range).

Medium-Term Financial Stability Risks Are Growing


11. The financial system appears healthy but medium-term risks to
financial stability are rising

. U.S. banks are well capitalized and asset quality appears to be
generally good. Credit remains available to both households and
corporations and the cost of borrowing is relatively low.
However, corporate leverage is historically high, and
underwriting standards are weakening. In addition, asset
valuations are rich while risk premia, term premia and the
market pricing of volatility are at low levels leaving
financial conditions extremely loose. An abrupt reversal of
this accommodative environment, interacting with leveraged
corporate balance sheets, could create a significant downdraft
to activity, investment, and job creation.


12. It is of concern, therefore, that there has been little
institutional response to counter these growing risks to
medium-term financial stability.

Instead, the recent tailoring of financial regulation has led to a
steady easing of regulatory constraints at a late stage in the
cycle. It is thus essential that any further changes to the
financial oversight regime not only preserve, but also enhance, the
current risk-based approach to regulation, supervision and
resolution. Risk-based capital and liquidity standards, combined
with strong supervision, need to be the central tools in
incentivizing financial institutions to manage well the risks they
undertake, including through a robust Comprehensive Capital
Analysis and Review process. The FSOC should continue its efforts
to respond to emerging threats to financial stability and, in this
work, there is scope to strengthen and more fully resource the
Office of Financial Research. Also, the U.S. should maintain its
engagement in developing the international financial regulatory
architecture while adhering to agreed, international standards.
Finally, there is a need to strengthen the oversight of nonbanks
and to address continuing data blind spots that impede a full
understanding of the nature of financial system risks,
interlinkages and interconnections associated with nonbanks. These
topics will be a focus of the ongoing Financial Sector Assessment
Program for the United States.


Trade Tensions Represent a Threat to The Outlook


13. For the global economy to function well, it needs to be able to
rely on a more open, more stable, and more transparent,
rules-based international trade system

. Rising import tariffs and other steps taken by the administration
are undermining the global trading system, increasing restrictions
on trade in goods and services, and catalyzing a cycle of
retaliatory trade responses. Rather than expanding tariff and
non-tariff barriers, the U.S. and its trading partners should work
constructively to better address distortions in the trading system
that are partly rooted in the system’s inability to adapt to
long-term changes in the international environment. It is
especially important that the trade tensions between the U.S. and
China—which represent a threat to the global outlook and create
important negative spillovers to other countries—are quickly
resolved through a comprehensive agreement that strengthens the
international system (not through a managed trade deal that targets
a compression in the bilateral U.S.-China trade deficit). As
highlighted in the April 2019 World Economic Outlook, tariff
measures are likely to be ineffective at containing bilateral trade
deficits and will be damaging to the U.S. and to global
macroeconomic outturns. Instead, the external imbalance will need
to be addressed through fiscal adjustment and supply side reforms
that improve productivity and competitiveness.

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14. The U.S. would gain by working with international partners to
strengthen the rules-based, multilateral trading system

. This should include advancing trade negotiations in areas such as
e-commerce and services and ensuring the continued enforceability
of existing WTO commitments through a well-functioning WTO dispute
settlement system. In this regard, the U.S., Mexico and Canada
Agreement could, if approved, alleviate uncertainty and provide
some modernization in the areas of services, e-commerce, and data
transparency.


15. Finally, greater attention needs to be paid to the welfare of
those workers dislocated by the ongoing reshaping of the U.S.
economy by technology and trade.

This will require intensifying policy efforts such as through
greater public investments in training and education, temporary
income support, and job search assistance.

Governance and Transparency Assessment


16. In line with the recommendations of the Financial Action Task
Force’s Mutual Evaluation Report, the U.S. should address
weaknesses in entity transparency and the content and coverage
of preventive measures that may make it easier for foreign
corrupt officials to hide their proceeds in the U.S.

The U.S. is substantially effective at investigating and
prosecuting money laundering and in cooperating with other
jurisdictions in investigations that involve corruption proceeds
held in the U.S. However, more needs to be done to ensure law
enforcement agencies have timely access to beneficial ownership
information (to speed up investigations and help prevent the abuse
of legal entities for money laundering purposes). Requirements
should also be strengthened for regulated firms regarding the
identification and verification of beneficial ownership for
customers and politically exposed persons. Improvements are also
needed to make lawyers, accountants, and trust and company service
providers subject to customer due diligence and suspicious
transaction reporting obligations. Finally, there is a need to
address money laundering risks in high-end real estate (where
real-estate agents are not subject to comprehensive AML/CFT
requirements and where non-bank mortgage lenders and originators
have limited awareness of obligations, especially with regard to
politically exposed persons).


United States: Selected Economic Indicators

Projections

2018

2019

2020

2021

2022

2023

2024

Real GDP (% change from previous period)

2.9

2.6

1.9

1.8

1.7

1.6

1.6

Real GDP (q4/q4)

3.0

2.3

1.9

1.7

1.7

1.6

1.6

Output gap (% of potential GDP)

1.1

1.7

1.7

1.6

1.6

1.5

1.4

Unemployment rate (q4 avg.)

3.8

3.5

3.5

3.7

3.7

3.8

3.8

Current account balance (% of GDP)

-2.3

-2.1

-2.5

-2.7

-2.6

-2.5

-2.4

Fed funds rate (end of period)

2.4

2.6

2.9

2.9

2.9

2.9

2.8

Ten-year government bond rate (q4 avg.)

3.0

2.8

3.0

3.2

3.2

3.2

3.2

PCE Inflation (q4/q4)

1.9

2.1

2.2

2.0

1.9

1.9

2.0

Core PCE Inflation (q4/q4)

1.9

1.8

2.1

2.1

2.0

2.0

2.0

Federal fiscal balance (% of GDP)

-3.9

-4.2

-4.0

-4.0

-4.3

-4.1

-3.8

Federal debt held by the public (% of GDP)

77.8

78.7

79.6

80.6

82.0

83.3

84.2

Sources: BEA; BLS; Haver Analytics; and IMF staff
estimates.

IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER: Randa Elnagar

Phone: +1 202 623-7100Email: MEDIA@IMF.org






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