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US economy improving at “tepid” rate, says IMF

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The United States economy is improving, says the IMF, describing the country’s recovery as “tepid”. It noted gains in house prices and stock markets, and predicted that growth will probably be faster next year.

The authors of the IMF Country Report No. 13/236 United States 2013 Article IV Consultation wrote that although the USA continues to face “powerful headwinds, the nature of the recovery appears to be changing.”

Even though lawmakers managed to avert the fiscal cliff at the beginning of this year, growth so far in 2013 has been undermined by government automatic across-the-board spending cuts (“sequester”) and the expiration of the payroll tax cuts earlier in March this year.

The U.S. economy grew by 1.8% in the first quarter of 2013, with indicators pointing to slower growth during the second quarter.

In 2012, U.S. GDP grew at 2.2%. Growth was modest due to:

  • The legacy effects from the financial crisis.
  • The budget deficit reduction.
  • An unfavorable external environment (world economy).
  • Extreme weather-related events (which had temporary effects).

Below are some highlighted data from the IMF’s latest report:

  • Stock markets have “soared” this year.
  • House prices have risen by over 10% in 12 months. This has supported private demand as household balance sheets have strengthened.
  • Residential construction activity has accelerated.
  • Labor market conditions have improved considerably.

Much of these improvements are due to the very easy financial conditions “with the Fed continuing to add monetary policy accommodation over the past year.” In May 2013 the Fed said that it might scale back its asset purchases later in the year, which led to tighter financial conditions. However, the IMF says the financial conditions remain extremely accommodative.

2.7% GDP growth expected for 2014

As the legacies of the financial crisis fade and the fiscal drag subsides, the IMF predicts a GDP growth of 2.7% for next year.

The unemployment rate is expected to remain the same this year and to gradually decline in 2014.

Inflation is expected to rise slightly, but will most likely stay within the Fed long-term goal of 2% “given the lingering slack in the economy”.

The authors added:

“The risks to the outlook appear modestly tilted to the downside. Economic activity could be lower than in our baseline scenario in the presence of a stronger-than-projected impact of fiscal consolidation, a faster-than-expected increase in interest rates, a weaker external environment, or higher structural unemployment.

In contrast, the recovery could be stronger than we anticipate if the rebound of the housing market were to ignite a positive feedback loop between higher house prices, easier mortgage conditions, and stronger consumption and investment.”

The Federal Reserve has indicated that it plans to keep interest rates low for a considerable time after the economy picks up, and that its timeline for tapering bond purchases will depend on the economy’s performance.

Although the Obama Administration says it is committed to a gradual reduction in the budget deficit, the IMF wonders how this is possible with the political gridlock in Congress.

U.S. banks healthier than before

Although “U.S. banks’ health has improved significantly over the past 12 months”, persistently low interest rates as well as some other signs point to continuing vulnerabilities in the financial sector.

The authors wrote “Further progress was made on strengthening financial regulation, including introducing rules that adopt Basel III capital standards, designating two systemically-important nonbank financial institutions, and proposing a reform of the money market mutual funds industry.”

Reuters quoted Gian Maria Milesi-Ferretti, IMF Mission chief for the United States, as saying “We think that the strategy of the Federal Reserve to condition the pace of reduction in purchases of assets to the performance of the economy is wise and key to maintaining the needed momentum for the recovery.”

The recession was over four years ago, but the American economy is not yet “back to normal”. The IMF says a normal economy does not spend $85 billion a month on government debt and mortgage-backed financial assets while keeping its interest rates at nearly zero percent. The IMF also described this year’s belt-tightening by the government as “excessively rapid”.