Concerted Efforts Needed to Boost U.S. Long-term Growth and Reduce Poverty

Recovery gathering steam but weak first quarter means 2014 growth will disappoint

Forging agreement on credible medium-term fiscal consolidation plan remains a high priority

Exiting from zero interest rates will be complex task that requires careful communication

Economic activity in the United States accelerated in the second half of 2013, but an unusually harsh winter conspired with other factors—including a still-struggling housing market, an inventory correction, and slower external demand—causing momentum to fade. Output tumbled to -2.9 percent in the first quarter of 2014—the first quarterly contraction since early 2011.

The IMF expects growth to accelerate in the remainder of this year (in the 3–3½ percent range), as employment improves, firms boost production, sales and orders of durable goods pick up, and confidence returns. The large drag from the first quarter contraction will be tough to offset, however, and growth for the year as a whole will be a disappointing 1.7 percent. Still, the IMF team expects growth to accelerate in 2015 to the fastest annual pace seen since 2005.

Tackling poverty

Despite improving growth and rising employment, almost 50 million Americans still live in poverty, unable to earn enough to meet their basic needs, and this includes almost one-in-four American children. Improved employment prospects and economic growth will be essential to bringing this number down, but the IMF report argues for an expansion of the Earned Income Tax Credit and an increase in the minimum wage as part of the solution.

Boosting long-term growth

Without further policy interventions, the IMF expects potential growth to level off at around 2 percent in the coming years given the drag from population aging on labor force expansion and slower productivity growth. This is well below the average potential growth rate of over 3 percent seen in the decade before the financial crisis.

The IMF recommends policies to counter this decline in longer-term growth including greater investment in U.S. infrastructure, improving educational outcomes, a better tax system, and building a skilled labor force (including through immigration reform, job training, and providing childcare assistance for working families).

Reducing debt

The IMF team continues to argue for a credible...