U.S. Growth Bouncing Back

SUMMARY

Despite a slowdown in growth during the first few months of 2015, the U.S. economy is strengthening and there are steady gains in job creation, the IMF said in its annual review on the state of the U.S. economy.

 
FREE EXCERPT

  • U.S. growth strengthens, expected to reach 2.5 percent in 2015
  • Case for deferring interest rate increase until greater signs of wage or price inflation
  • U.S needs to put public finances on sustainable path, address fiscal imbalances
  • According to the report, the U.S economy’s momentum in the first quarter was derailed by unfavorable weather, a sharp contraction in oil sector investment, and the West Coast port strike.

    Even with this weaker first quarter, the IMF said that growth this year is projected at 2.5 percent. Barring any negative shocks, the U.S. economy should be able to bounce back to 3 percent by 2016.

    Sustained growth over the next two years should return output to its potential by end-2017. However, potential growth—at around 2 percent—is expected to be considerably weaker than pre-crisis levels unless a broad range of structural weaknesses are tackled to raise productivity, create incentives for innovation and capital formation, and boost labor force participation, the report said.

    Risks to sustained growth

    Risks to the outlook remained broadly balanced but the report highlights several uncertainties ahead.

    The stronger dollar is impacting U.S. growth and job creation, as well as weighing on inflation. If the U.S. currency were to appreciate markedly, that could create concerns, including in some emerging market economies, and the potential for a rise in global imbalances.

    The housing recovery is not yet on a solid footing. The demand for housing remains depressed although there is potential for pent-up demand, including from millennials, as household incomes rise and job prospects become more secure.

    A continued weakening of growth in the rest of the world could suppress U.S. exports and investment in tradable sectors.

    A data dependent approach to monetary policy

    The U.S. Federal Reserve’s first interest rate increase in almost nine years has been carefully prepared and announced. Nonetheless, regardless of the timing, higher U.S. policy rates could still result in significant market volatility and financial stability consequences that go well beyond U.S. borders.

    The IMF report argues waiting to raise rates until there are greater signs of wage or price inflation. Under staff’s macroeconomic outlook, and assuming no surprises to either growth or inflation, such a data-dependent approach would imply keeping the federal funds rate at 0–0.25 percent into the first half of 2016, with a gradual rise in the federal funds rate...

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