IMF Says US Economy in ‘Good Shape,’ but Faces Challenges

With an unemployment level of 4.7% and 2.4 million new jobs created in 2015, the U.S. economy is “overall, in good shape” according a statement by the International Monetary Fund (IMF) released Wednesday. The IMF also notes the country’s “contained” inflation and economic resilience to continued volatility in the financial markets, a strengthening dollar and cooling global demand.

The IMF has just concluded its 2016 review of the United States — called an Article IV Consultation — noting that:

Despite these important achievements, the U.S. faces potentially significant longer-term challenges to strong and sustained growth. Concerted policy actions are warranted, sooner rather than later.

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IMF Managing Director Christine Lagarde outlined four challenges facing the United States:

• Declining labor force participation
• Declining productivity growth
• Widening inequality of wealth and income
• Increasing share of the population living in poverty

The IMF estimates U.S. growth at 2.2% in 2016, down from 2.4% in 2015, but rising to 2.5% in 2017. Headline inflation is expected to rise to 1.2% in 2016 and 2.2% in 2017, while core inflation is forecast at 1.8% this year and 2.1% for next year. The country’s current account deficit, at today’s exchange rate, is forecast to increase from −2.7% in 2015 to −2.9% in 2016 and −3.5% in 2017.

The decline in labor force participation is “an inevitable consequence of an aging society,” the IMF says, but there are steps that could ameliorate some of the negative effects. The same is true of declining productivity.

The report outlines the secular forces that are weighing on the U.S. economy:

Demographic changes are slowing potential growth, delaying the renewal of business equipment, and depressing labor force dynamism. Reduced dynamism in the corporate sector has the potential to diminish innovation, deepen the loss of middle income jobs, and further polarize the income distribution. Income polarization itself can prevent productivity-improving investments in education by poorer households, lessen social mobility, add to economic insecurity, and limit consumption prospects. The causes of and interactions between these various forces are complex and not well understood. However, what is clear is that these trends are coinciding with a well-documented decline in potential growth (from above 3 percent in the early 2000s to below 2 percent today) that is being mirrored across a range of advanced and emerging economies. If left unchecked, these forces will continue to drag down both potential and actual growth, diminish gains in living standards, and worsen poverty.

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The IMF then notes the impact of income inequality and poverty in the United States and how to address these issues:

There is an urgent need to tackle poverty. In the latest data, 1 in 7 Americans is living in poverty, including 1 in 5 children and 1 in 3 female-headed households. Around 40 percent of those in poverty are working. A more generous earned income tax credit (including eligibility for workers without dependents, those under 25, and older workers that are not yet eligible for social security) combined with a higher federal minimum wage would help alleviate poverty. These two measures would have strong complementarities. The improvements in the EITC can work in tandem with the minimum wage to ensure a meaningful increase in after-tax earnings for the nation’s poorest households. Upgrading social programs to support the nonworking poor would also be a step forward. Efforts to improve K-12 education, investing in early childhood education, subsidizing childcare for lower income families, and expanding needs-based support for tertiary and vocational education can have important effects, over a longer horizon, in reducing the inter-generational persistence of poverty.

Here is the IMF’s full concluding statement and the press release that includes Lagarde’s remarks.