Assessing the Strong U.S. Economic Performance

• Pages: 270-272

Page 270

The following article is based on the recent Article IV consultation discussions by the staff of the IMF's Western Hemisphere Department with the U.S. authorities.

The United States is currently enjoying one of the longest economic expansions since World War II, marked by a combination of strong growth, high rates of job creation, and low inflation. The successful implementation of fiscal and monetary policy over the past four years underpins this robust performance. In FY 1996 (October 1-September 30), the federal fiscal deficit reached its lowest level relative to GDP in over twenty years, and it is expected to decline further in FY 1997. At the same time, monetary policy has held inflation at a relatively low rate while promoting continued expansion of the economy. Flexibility in labor and product markets has helped foster job creation, bringing the unemployment rate down to its lowest level in decades and restraining inflationary pressures. Real GDP growth in the United States rose to 2.8 percent in 1996 from 1.6 percent in 1995. It reached an annualized rate of 4.9 percent in the first quarter of 1997, before easing to an annual rate of 2.2 percent in the second quarter of 1997. The unemployment rate hovered between 5.2 and 5.4 percent from the second half of 1996 through early 1997, before falling below 5 percent on average during May-July 1997. At 4.8 percent in July 1997, unemployment is well below most estimates of the natural rate. At the same time, there is little evidence of inflationary pressures. Excluding volatile food and energy prices, inflation measured by the consumer price index (CPI) fell to an annual rate of around 2!/2 percent during 1996 and the first six months of 1997 from 3 percent in 1995.

Flexibility in labor and product markets has helped foster job creation in the United States.

Apart from the successful implementation of macroeconomic policies, Federal Reserve Chairman Alan Greenspan-in his recent testimony before the U.S. Congress-attributed the exceptional performance to possible improvements in long-term economic efficiency and to temporary factors restraining inflation:

* Technological advances appeared to have boosted productivity growth.

* A heightened sense of job insecurity has held down wage demands.

* Changes in the health care industry have curbed the growth in the cost of benefits and, hence, overall labor compensation.

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