IMF cuts US growth outlook, says full employment years off

Monday 16 June 2014 17.16
The IMF forecasts US economic growth of 2% this year
The IMF forecasts US economic growth of 2% this year

The International Monetary Fund cut its growth forecast for the US today and said the economy would not reach full employment until the end of 2017.

This will allow the Federal Reserve to bide its time before raising interest rates. 

In its annual health check of the US economy, the IMF also urged the US to boost the minimum wage, which is below most international standards, to fight poverty, which lingers above 15%. 

The IMF forecast economic growth of 2% this year, below the 2.8% rate it predicted in April, due to a weak first quarter. It kept its 2015 forecast unchanged at 3%. 

"Recent data suggest a meaningful rebound in activity is now underway and growth for the remainder of this year and 2015 should well exceed potential," the IMF said. 

Yet the country's potential growth should only be around 2% going forward, below historical averages, as the population ages and productivity growth slows, it added. 

"Given the substantial economic slack in the economy, there is a strong case to provide continued policy support," the IMF said.

It said its forecasts show the US economy would only return to full employment by the end of 2017, with inflation remaining low, suggesting the Fed could keep rates at zero for longer than the middle of 2015. 

The IMF urged the US to increase spending on infrastructure and education and change parts of its tax system, including boosting the federal petrol tax and reinstating the tax credit for research and development, to help spur growth.

In the future, the US should also reform corporate taxes, introduce a carbon tax and move toward a federal value-added tax, the IMF said. 

A greater reliance on growth-enhancing fiscal policies could allow the Fed to retreat more quickly from its extraordinary monetary stimulus, it added. 

"This would be the best policy mix from an economic perspective but, regrettably, political agreement on such an approach remains elusive," the IMF said. 

The IMF warned that financial markets could be too complacent about possible volatility surrounding a future rate increase. Markets predict a narrow range of future policy rates, despite uncertainty about the amount of slack in the US labour market and the potential for wage and price inflation. 

"This sets up the risk, even with a successful and well-communicated increase in interest rates, for significant swings in market flows and prices in the months ahead," the IMF said. 

It said the Fed should consider further changes to its communication to better guide markets, including holding a news conference after each meeting of its policy-setting committee and publishing quarterly reports on monetary policy. 

"Finally, the (Fed's policy-setting panel) could provide greater clarity about how financial stability considerations figure into its monetary policy calculus," the IMF said. 

Fed policymakers meet on Tuesday and Wednesday to consider their monetary policy stance. 

US manufacturing rose in May

US manufacturing output rose in May and factory activity in New York state accelerated sharply this month, buoying hopes of a strong rebound in economic growth this quarter.
              
The brightening growth outlook was further boosted by news that confidence among home builders perked up this month, a good omen for the struggling housing market.
              
"Today's figures are evidence of a strengthening recovery ofthe economy. Things are really hopping out there," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.
              
Factory production increased 0.6% last month as output rose across a swath of industries, the Federal Reserve said.

It also said output had slipped 0.1% in April, not as deeply as it had previously thought.
              
Separately, the New York Federal Reserve said its "Empire State" general business conditions index rose to 19.28 this month, the highest reading since June 2010, from 19.01 in May. Readings above zero indicate growth.
              
Factory orders in the state hit a four-year high and inventories increased significantly, indicating that restocking will contribute to growth this quarter after weighing heavily on the economy in the first three months of the year.
              
Although job growth at New York factories slowed, employees worked longer hours.