© 2012 International Monetary Fund 

IMF Country Report No. 12/213 

UNITED STATES 

2012 ARTICLE IV CONSULTATION 

 

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with 

members, usually every year. In the context of the 2012 Article IV consultation with United States, 

the following documents have been released and are included in this package: 

 Staff Report for the 2012 Article IV consultation, prepared by a staff team of the IMF, 

following discussions that ended on July 2, 2012, with the officials of United States on economic 

developments and policies. Based on information available at the time of these discussions, the 

staff report was completed on July 12, 2012. The views expressed in the staff report are those of 

the staff team and do not necessarily reflect the views of the Executive Board of the IMF. 

 Informational Annex 

 Staff Supplement of July 27, 2012 updating information on recent developments. 

 Staff Statement of July 30, 2012 updating information on recent developments. 

 Public Information Notice (PIN) summarizing the views of the Executive Board as 

expressed during its July 30, 2012 discussion of the staff report that concluded the Article IV 

consultation. 

The document listed below has been or will be separately released. 

 Selected Issues Paper 

 

The policy of publication of staff reports and other documents allows for the deletion of 

market-sensitive information. 

Copies of this report are available to the public from 

International Monetary Fund  Publication Services 

700 19th Street, N.W.  Washington, D.C. 20431 

Telephone: (202) 623-7430  Telefax: (202) 623-7201 

E-mail: publications@imf.org Internet: http://www.imf.org 

International Monetary Fund 

Washington, D.C. 

August 2012 
 

 s 

UNITED STATES 

STAFF REPORT FOR THE 2012 ARTICLE IV CONSULTATION 

KEY ISSUES 

Context: The recovery continues to be tepid, employment remains well below precrisis levels, and the housing market is stabilizing but is still at depressed levels. 

Downside risks around the outlook have intensified, including from the worsening of 

the euro area debt crisis as well as the uncertainty over domestic fiscal plans. 

Short-term policy challenges: Fiscal deficit reduction should proceed at a measured 

pace, to avoid undermining the fragile recovery. Monetary policy remains appropriately 

accommodative, with room for some further easing if the outlook were to deteriorate. 

Authorities’ measures to boost the housing market are a step in the right direction, 

with scope for a more aggressive implementation to speed up the housing adjustment.

Medium-term policy challenges: A credible fiscal consolidation plan including 

entitlement reforms and higher revenues is crucial for stable medium-term growth, and 

would allow more room for short-run fiscal policy maneuver. More resources should be 

devoted to active labor market policies, including those aimed at the long-term 

unemployed, to prevent long-term unemployment from becoming structural. There has 

been good progress over the past year in implementing the Dodd-Frank Act, but more 

remains to be done to increase the resilience of the U.S. financial system. 

Spillovers: Striking the right balance between fiscal consolidation and macroeconomic 

policy support would benefit the rest of the world, as it would avoid the risk of a spike 

in U.S. interest rates in the medium term and an abrupt decline in U.S. growth next 

year, at a particularly delicate juncture for the world economy. Further monetary easing 

may weaken the U.S. dollar, but would have positive spillovers from strengthening the 

U.S. economy and hedging against downside risks.

July 12, 2012 
2012 ARTICLE IV REPORT UNITED STATES

2 INTERNATIONAL MONETARY FUND

Approved By 

Nicolás Eyzaguirre 

and Tamim Bayoumi 

Discussions took place in Washington, D.C., during May 21–June 11, 

2012 and the concluding meetings on June 27 and July 2, 2012. The 

team comprised Gian Maria Milesi-Ferretti (head), Roberto Cardarelli, 

Oya Celasun, Francesco Columba, Jihad Dagher, Geoffrey Keim, Eric Le 

Borgne, Paulo Medas, Martin Sommer, and Julien Reynaud (all WHD); 

Sally Chen (SPR); and Stephen Smith (MCM), with contributions from 

Jack Grigg, Thornton Matheson, and Ian Parry (FAD); Nadia Rendak, 

Andrew Giddings, Yan Liu, Steve Dawe, and Emmanuel Mathias (LEG); 

John Kiff (MCM); Ranil Salgado, Marshall Mills, Katrin Elborgh-Woytek, 

and Lars Engstrom (SPR). 

CONTENTS 

BACKDROP: STILL A FRAGILE RECOVERY _______________________________________________________ 4

OUTLOOK AND RISKS ___________________________________________________________________________ 9

POLICY DISCUSSION ____________________________________________________________________________ 13

A. Context ________________________________________________________________________________________ 13

B. Fiscal Policy: Pace of Consolidation and Medium-Term Framework ___________________________ 14

C. Monetary Policy _______________________________________________________________________________ 18

D. Housing Policy ________________________________________________________________________________ 20

E. Challenges Facing the Labor Market ___________________________________________________________ 22

F. Financial Sector Conditions and Policies _______________________________________________________ 23

G. The United States and the World Economy ___________________________________________________ 28

STAFF APPRAISAL ______________________________________________________________________________ 30

TABLES 

1. United States: Selected Economic Indicators __________________________________________________ 45

2. United States: Balance of Payments ___________________________________________________________ 47

3. United States: Federal and General Government Finances ____________________________________ 48

4a. United States: General Government Statement of Operations _______________________________ 48

4b. United States: General Government Financial Assets and Liabilities _________________________ 49

5. United States: Indicators of External and Financial Vulnerability ______________________________ 50
UNITED STATES 2012 ARTICLE IV REPORT 

INTERNATIONAL MONETARY FUND 3

FIGURES 

1. House Prices and Mortgage Market Developments __________________________________________ 51

2. Housing Market Developments _______________________________________________________________ 52

3. The Dollar, Financial Flows, and Trade ________________________________________________________ 53

4. Labor Market Developments __________________________________________________________________ 54

5. Core Inflation Remains Subdued ______________________________________________________________ 55

6. Slow Financial Sector Healing _________________________________________________________________ 56

7. U.S. Public Finances Remain Unsustainable ___________________________________________________ 57

8. State and Local Governments Continue Fiscal Adjustment ___________________________________ 58

BOXES 

1. Financial Conditions in the U.S. _______________________________________________________________ 35

2. The Effects of Recent U.S. Monetary Policy Actions _____________ Error! Bookmark not defined.

3. The Health of the U.S. Banking System _______________________________________________________ 37

4. Meeting Environmental and Fiscal Objectives with a Carbon Tax _____________________________ 39

5. Recent Housing Policies and Remaining Frictions _____________________________________________ 40

6. Progress in Addressing U.S. FSAP Recommendations _________________________________________ 41

7. Recent Proposals on GSEs Reforms ___________________________________________________________ 42

8. The U.S. External Sector: Trends and Model-Based Assessments _____________________________ 43

ANNEXES 

I. United States: Downside Risk Assessment Matrix ______________________________________________ 59

II. United States: Public Sector Debt Sustainability ______________________________________________ 60

 
2012 ARTICLE IV REPORT UNITED STATES

4 INTERNATIONAL MONETARY FUND

BACKDROP: STILL A FRAGILE RECOVERY 

1. The U.S. economy continues to recover at a tepid pace. After rebounding in the second 

half of 2011, growth has decelerated to around 2 percent in the first half of 2012. Job creation, 

surprisingly strong at the end of 2011 and in early 2012, has also slowed considerably since April. 

The deceleration reflects in part a return to the sluggish growth rates that tend to characterize the 

aftermath of financial crises and housing busts. It is also likely to reflect a number of other factors: 

 Continued fiscal withdrawal and less 

favorable external conditions; 

 Seasonal adjustment issues following the 

Great Recession, which may have made the 

data for the fall and winter quarters look 

strong relative to the spring, a pattern also 

seen over the last two years; 

 The unusually mild winter, which may have 

pulled forward some activity into late 2011–

early 2012; 

 The boom in gasoline prices between 

November and February—which reversed after April—may have weighed on private 

consumption in the spring. 

2. Strong headwinds persist on private consumption, as households continue to 

deleverage amid weak—albeit stabilizing—house prices. For the U.S. household sector as a 

whole, the net worth-to-disposable income ratio is now slightly above its pre-housing boom levels, 

largely thanks to the recovery of financial asset valuations. However, these primarily affect upper 

income groups, and the majority of U.S. households are still left with net-worth ratios well below 

pre-boom levels, reflecting depressed house prices and elevated debt. Indeed, staff research finds 

that middle-income households, whose balance sheets were hurt severely by the housing bust, have 

made limited progress in increasing their net worth through saving (Selected Issues Paper 

Chapter I). Reflecting the ongoing repair of balance sheets and tight credit conditions for 

households, the growth of private consumption remains sluggish, broadly in line with weak growth 

in incomes.1

 House prices have recently shown some signs of stabilization, with the three main 

house price indices increasing in February, March, and April. However, the risk of further declines 

remains significant, given the large “shadow” inventory—properties that are likely to end up in 

 

1

 The ratio of personal savings to disposable declined in 2012Q1 as gasoline prices surged. Data on personal income 

and saving have been subject to large revisions over the past year. 

-15

-10

-5

0

5

10

-15

-10

-5

0

5

10

2008 2009 2010 2011 2012

Government

Net exports

Chg private inventories

Private fixed investment

Personal consumption exp.

Contributions to Real GDP Growth

(percentage points, s.a.a.r.)

Real GDP growth

Source: Haver Analytics.
UNITED STATES 2012 ARTICLE IV REPORT 

INTERNATIONAL MONETARY FUND 5

distressed sales (Figure 1).2 Foreclosures impose high costs on the economy, including through their 

adverse impact on house prices and the resulting decline in households’ wealth and consumption. 

Households’ access to credit remains tight, as weak house prices and broader economic conditions 

weigh on their creditworthiness (Box 1). Recent actions by the GSEs to expand access to refinancing 

could ease access to mortgages, and give some support to households’ disposable income and 

spending. 

3. Residential construction has been improving, but from very depressed levels. The 

number of housing starts, a major component in residential investment, has been rising since 

2011Q3, with starts in 2012Q1 more than 20 percent higher than a year earlier (Figure 2). The 

recovery is more evident in the multi-family sector, reflecting relatively higher demand for rental 

units as the homeownership ratio continues to decline toward its pre-bubble levels. However, 

housing starts remain at only about one half of their 1990s average. Persistently weak construction 

activity is due to the overbuilding during the boom years and depressed household formation since 

the crisis. Staff estimates that, despite four years of very low residential construction activity, there is 

still an excess supply of housing that will be absorbed gradually as household formation normalizes 

(Selected Issues, Chapter II).

4. Business fixed investment seems to have lost some momentum, despite 

extraordinarily low borrowing costs and relatively favorable financial conditions facing the 

corporate sector. Indeed, cash-rich firms are tapping bond markets at very low rates, enjoying 

easier access to bank credit, and have profit margins at historically high levels. The deceleration that 

started in 2011Q4, following an uptick in 2011Q3, has been fairly broad-based. It likely reflects, in 

part, the partial phasing out of accelerated depreciation tax incentives in January 2012, which may 

have pulled equipment purchases forward into the second half of 2011. However, uncertainties 

surrounding the future tax regime and the economic outlook—given the financial strains in the euro 

area and risks surrounding fiscal policies at home—may also have played a role. 

5. Net exports failed to add to growth over the last two quarters. Imports rebounded over 

2011Q4 and 2012Q1 after a slowdown associated with the Japanese earthquake’s disruptions in 

mid-2011. Exports, which had been a bright spot in the recovery, decelerated through 2011, in line 

with generally lower growth in foreign demand. Their rebound in 2012Q1 is likely to be temporary, 

as evidenced by weak exports in April and May. The 7 percent real appreciation of the dollar 

between its multi-decade trough in July 2011 and June 2012—driven by a flight to U.S. dollar 

assets—may also have contributed to slower export growth (Figure 3). Reflecting also sharply higher 

oil prices, the current account deficit edged up to 3.1 percent of GDP in 2011 and widened further in 

2012Q1 to 3.6 percent of GDP. 

 

2

 The “shadow” inventory includes underwater, delinquent, re-performing and Real Estate Owned (REO) properties. 

The latter are properties owned by a lender or guarantor—typically a bank or a government sponsored agency—

after an unsuccessful foreclosure auction. Re-performing loans are loans that were previously delinquent but have 

become current following a modification. 
2012 ARTICLE IV REPORT UNITED STATES

6 INTERNATIONAL MONETARY FUND

6. Fiscal policy is also weighing on growth, as the fiscal impulse turned negative in 2011 

for the first time since the financial crisis. The U.S. general government deficit, at about 

91⁄2 percent of GDP in 2011, remains one of the highest among major advanced economies, 

reflecting both cyclical weakness and a supportive structural stance. However, for the first time since 

the onset of Great Recession, the fiscal impulse was negative last year—the general government 

structural primary deficit fell by 3⁄4 percent of GDP, in part due to stronger-than-expected revenues. 

Fiscal policy remained a drag on growth also in 2012Q1 as defense spending declined with the 

ongoing withdrawal of overseas troops, state and local governments continued to downsize, and 

corporate investment incentives were scaled back. Meanwhile, policymakers have provided support 

to the weak recovery by extending the payroll tax cut and emergency unemployment benefits 

through 2012. 

7. The Fed responded to weaker-than-expected growth over the past year with a number 

of easing actions. With the federal funds rate at its lower bound of zero, it used innovative tools: 

 The FOMC started to provide more explicit guidance on the path of the federal funds rate, 

announcing in August 2011 that it anticipated economic conditions to warrant exceptionally low 

levels for the federal funds rate at least through mid-2013. Since January 2012, it has stated that 

economic conditions were likely to warrant low rates at least through late 2014. 

 In September 2011, the Fed launched “Operation Twist,” comprising purchases of up to 

$400 billion in Treasury securities with remaining maturities of 6–30 years and sales of an equal 

amount of securities with remaining maturities of 3 years or less, to be completed by June 2012. 

In addition, to support mortgage market conditions, it started reinvesting principal payments on 

agency debt and MBS into agency MBS. 

 On June 20, 2012 the Fed announced that it would continue through end-2012 its program to 

extend the average maturity of its securities holdings. This will entail sales or redemptions of 

about $267 billion in shorter-term securities, and purchases of longer-maturity Treasury 

securities of an equal amount, by the end of 2012. Once the maturity extension program is 

completed, the Federal Reserve will hold almost no securities maturing through January 2016
UNITED STATES 2012 ARTICLE IV REPORT 

INTERNATIONAL MONETARY FUND 7

8. These actions are estimated to have reduced yields on ten-year Treasuries by some 

60 basis points, supporting economic activity (Box 2). Commonly-used elasticities would suggest 

the policy-driven 60 basis point decline in the ten-year Treasury yield to be equivalent to a federal 

funds rate easing of some 150 basis points, with a growth impact of roughly 0.3 percentage points 

for each of the next two years.3

 The impact of these policy actions has gone beyond the effect on 

the term premium in longer-maturity Treasury yields: they seem to have postponed market 

expectations of the start of policy tightening and to have lowered mortgage interest rates, albeit by 

less than the decline in Treasury and MBS yields.4

 Staff estimates that changes in the size and 

composition of the Fed’s balance sheet provides at present an amount of “effective easing” broadly 

consistent with the historical relationship between the federal fund rate and inflation and the 

unemployment gap (the Rudebusch-Taylor rule). 

9. The transmission of the massive drop in longterm interest rates to aggregate demand has been 

hampered by obstacles to refinancing in the 

mortgage market. While under normal conditions a 

large decline in interest rates would lead to very 

significant mortgage refinancing, increasing disposable 

income and spending, high loan-to-value ratios, tighter 

credit standards, and rigidities in the mortgage market 

have prevented this from happening. 

 

3

 See, for example, Federal Reserve Bank of San Francisco Economic Letter 2010–18 on the sensitivity of output to 

short- versus long-term rates, and Macroeconomic Advisers’ Macro Musing Volume 3, Number 15 on the growth 

effects of changes in Treasury yields. 

4

 For instance, in May 2012 30-year fixed mortgage interest rates were about 80 basis points lower than their May 

2011 levels, whereas the 10-year Treasury yield and 30-year MBS yields were down by 140 basis points. 

-8

-6

-4

-2

0

2

4

6

8

-8

-6

-4

-2

0

2

4

6

8

2007 2009 2011 2013 2015 2017

Rules based 

rate

Effective rate adj. for accommodation 

through securities holdings

Actual, Effective, and Rule-Based Federal Funds 

Rates

(percent)

Sources: Board of Governors of the Federal Reserve System; Bloomberg , LP; and Fund staff calculations.

Notes: The “rule-based rate” is the federal funds rate (FFR) predicted by a Taylor-Rudebusch rule (estimated by regressing the 

FFR on the inflation rate and the deviation of the unemployment from the NAIRU). The “effective rate” is the actual FFR 

adjusted for the easing provided through the Fed’s securities holdings. See Federal Reserve Bank of San Francisco Economic 

Letter, 2010-18, for more details.

Paths for Federal Funds Rate Implied by 

Futures Contracts

(percent)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

2011 2012 2013 2014 2015

Forward guidance (Aug 9)

Operation twist

Forward guidance (Jan 25)

Operation twist 2

Current path

Days before

announcements

Actual rate

0

2

4

6

8

10

12

14

0

1

2

3

4

5

6

7

8

1990 1995 2000 2005 2010

Mortgage Rates and Refinancing Volume

Real mortgage rates

(percent; LHS)

Refinancing volume

(pct of total 

mortgages; RHS)

Source: Haver Analytics.
2012 ARTICLE IV REPORT UNITED STATES

8 INTERNATIONAL MONETARY FUND

10. The degree of resource slack in the U.S. economy remains ample. The output gap 

remains wide, even though staff has lowered its estimate of potential GDP relative to last year, 

reflecting lower estimates of trend TFP and labor force participation.5

 Staff’s current estimate of the 

output gap for 2012, a sizable 4.1 percent of potential output, is nonetheless larger than projected 

one year ago since the downward revision to potential output is more than offset by lower actual 

output. The pattern of growth since the crisis thus far is in line with the historical experience of 

advanced economies after financial crises, with a persistent deviation of output from the pre-crisis 

trend (Selected Issues, Chapter III). 

11. The employment-to-population ratio has recovered only modestly after its sharp 

decline in 2008–09, and long-term unemployment remains stubbornly high. The overall 

increase in employment since the start of the recovery was barely stronger than the increase in 

population, implying only a small improvement in the employment-to-population ratio, which 

remains about 4 percentage points below its level in December 2007. Meanwhile, the labor force 

participation rate has remained on a downward trend. The sluggish rise in the labor force, together 

with the moderate increase in employment, enabled a drop of about 1 percentage point in the 

unemployment rate over the last year, despite GDP growth only moderately above potential 

(Figure 4). Over 40 percent of the unemployed have been out of work for over six months—marking 

a record length and level for the United States. While unemployment remains primarily of a cyclical 

nature, a large and persistent pool of long-term unemployed individuals raises the concern of skill 

losses and a lower labor force participation rate over the medium term (Selected Issues, Chapter IV). 

12. The sizeable economic slack and well-anchored expectations have contained price and 

wage inflation. Headline consumer price inflation increased to a peak of 3.8 percent in September 

2011 due to rising commodity prices, but it has steadily declined since, to 1.7 percent in May 2012, 

as oil prices have receded (Figure 5). Core consumer price inflation has hovered around 2 percent, 

market- and survey-based measures of long-term inflation expectations remain stable, and the 

January 2012 announcement by the Federal Reserve of a formal 2 percent inflation goal should help 

keep inflation expectations well-anchored. Amid elevated labor market slack, wage inflation has 

remained subdued throughout the recovery, and stood at 1.4 percent (year-on-year) in May 2012. 

 

5

 The downward revision to trend TFP reflects the downward revision of actual output. Staff revised downward its 

projection of the labor force participation rate based on evidence suggesting that the older workers that have 

dropped out of the work-force since the recession are unlikely to come back. 
UNITED STATES 2012 ARTICLE IV REPORT 

 

INTERNATIONAL MONETARY FUND 9

OUTLOOK AND RISKS 

13. Growth is likely to remain moderate in the next two years, constrained by household 

deleveraging, fiscal restraint, and subpar global demand. Staff projects growth of 2 percent in 

2012, and a modest acceleration to 2.3 percent in 2013. Underlying these forecasts are the following 

assumptions: 

 Households are projected to continue the process of balance sheet repair. House prices are 

expected to bottom out around mid-2012 and increase very slowly thereafter, thus providing 

limited support to household net worth. Bank credit conditions, which are still tight for 

households and small businesses, are expected to continue to ease slowly. Consequently, 

consumption growth is projected to remain subdued (Figure 6). 

 The fiscal sector is expected to act as a moderate brake on growth. The general government 

(GG) structural primary balance is projected to improve by 1 percent of GDP in 2012, subtracting 

about 1⁄2 percentage point from growth. The fiscal outlook for 2013 is highly uncertain given the 

large number of expiring tax provisions and the threat of automatic spending cuts (the so-called 

“sequester”) in the context of highly polarized politics. Staff’s baseline envisages a relatively 

modest reduction in the GG structural primary balance in 2013 (11⁄4 percent of GDP), largely on 

account of expiring stimulus measures, such as the payroll tax cut, and a decline in war-related 

spending. The expiring Bush tax cuts and other revenue provisions are assumed to be extended 

fully for one year, with the tax cuts for upper-income taxpayers assumed to expire from 2014. 

The automatic spending cuts triggered by the failure of Congressional Committee on Deficit 

Reduction last November are expected to be replaced by other back-loaded measures. 

 Monetary conditions are expected to remain accommodative, with the tightening of policy rates 

beginning around late 2014 and a gradual unwinding of the Fed’s securities holdings starting in 

early 2014, as the recovery slowly gains traction. 

 Private investment in equipment and software is projected to expand at a slower pace than at 

the early stages of the recovery, but will remain a strong contributor to growth. After six 

consecutive years of negative contributions to growth, residential investment is projected to 

start adding to growth from 2012 onwards. 

 A stronger dollar and weaker global demand are projected to weigh on exports, with net 

international trade subtracting from growth over 2012–2017. Weaker oil prices will partly offset 

the negative impact of the dollar appreciation and weaker foreign demand on the current 

account. 

 Headline and core inflation are projected to remain subdued, reaching the Federal Reserve’s 

2 percent medium-term goal only in the medium term, thanks to a large output gap, weaker 

energy prices, and well anchored inflation expectations. 
2012 ARTICLE IV REPORT UNITED STATES

10 INTERNATIONAL MONETARY FUND

 The unemployment rate is projected to decline only slowly to 7.9 percent in 2013, as the 

economy is projected to grow modestly above potential through next year and the labor force 

participation rate is expected to stabilize. Long-term unemployment, which lags aggregate 

unemployment, will likely remain elevated. 

14. Risks to the outlook remain tilted to the downside. Risks are both external, particularly 

from a worsening of global conditions from the euro area debt crisis, and domestic, particularly from 

an impasse on the debt ceiling and a failure to reach an agreement on near-term tax and spending 

policies, which would trigger a “fiscal cliff”. Over the medium term, a failure to adopt a plan that 

would help achieve fiscal sustainability would also raise risks. 

15. An intensification of the euro area debt crisis would weigh on U.S. growth. While U.S. 

financial institutions have limited direct claims on the euro area periphery, their claims on the core 

euro area and the United Kingdom are sizeable. A worsening of the euro area debt crisis that 

involves these economies may thus affect the United States, through a variety of channels: 

Average

2000-08 2009 2010 2011 2012 2013 2014 2015 2016 2017

Real GDP 2.0 -3.5 3.0 1.7 2.0 2.3 2.8 3.3 3.4 3.3

Personal consumption expenditures 2.4 -1.9 2.0 2.2 2.2 2.3 2.4 2.5 2.8 3.2

Gross private fixed investment 0.5 -18.8 2.6 6.8 6.6 8.3 10.3 11.0 9.8 8.4

Change in private inventories 1/ -0.1 -0.8 1.6 -0.2 0.2 0.1 0.0 0.0 0.0 0.0

Government consumption and investment 2.2 1.7 0.7 -2.1 -2.1 -1.5 -0.4 1.2 1.5 0.1

Net exports 1/ -0.1 1.1 -0.5 0.0 -0.1 -0.2 -0.2 -0.3 -0.3 -0.3

Potential GDP 2.7 1.7 1.2 1.7 1.9 2.0 2.1 2.3 2.3 2.4

Output gap 2/ 1.1 -6.0 -4.3 -4.3 -4.1 -3.9 -3.2 -2.2 -1.2 -0.3

Consumer price inflation 2.8 -0.3 1.6 3.1 2.2 1.7 1.8 1.9 2.1 2.2

Unemployment rate 5.1 9.3 9.6 9.0 8.2 7.9 7.5 6.9 6.3 5.9

Investment rate 19.5 14.7 15.8 15.9 16.4 17.1 17.8 18.7 19.4 20.0

Private saving 15.2 18.4 19.2 18.9 17.9 17.4 16.5 16.6 17.0 17.5

Household saving rate 3/ 3.2 5.1 5.3 4.6 3.8 3.8 3.6 3.9 4.2 4.2

Government saving 0.0 -7.0 -6.6 -6.0 -4.6 -3.3 -1.7 -1.0 -0.9 -1.0

Current account balance -4.9 -2.7 -3.0 -3.1 -3.1 -2.9 -3.0 -3.1 -3.3 -3.5

Yield on 3-month treasury bill 3.0 0.2 0.1 0.1 0.1 0.1 0.1 0.7 1.8 3.4

Yield on 10-year treasury note 4.6 3.3 3.2 2.8 2.1 2.8 3.6 4.5 5.1 5.6

Sources: Bureau of Economic Analysis; Bloomberg, LP; Haver Analytics, and Fund staff estimates.

United States: Medium-Term Outlook

Projections

1/ Contribution to real GDP growth, percentage points.

2/ Percent of potential GDP.

3/ Percent of personal disposable income.

(percent change, unless otherwise noted)

(percent of GDP, unless otherwise noted)

(percent)
UNITED STATES 2012 ARTICLE IV REPORT 

INTERNATIONAL MONETARY FUND 11

 The trade channel. Lower demand in the euro area would reduce U.S. exports to the region 

(which account for about 15 percent of overall U.S. exports or 2 percent of GDP). In addition, 

renewed financial turmoil in the euro area would likely be accompanied by some U.S. dollar 

appreciation on safe haven flows, implying a further drag to exports. For example, a two 

percentage point drop in euro area growth (similar to the downward revision to euro area 

growth projections for 2012–13 between the September 2011 and January 2012 WEO) 

accompanied by a 5 percent real effective appreciation of the dollar (as occurred between 

August and December 2011) could reduce U.S. GDP by between 3⁄4 and 1 percentage point over 

a two-year horizon. 

 Risks of generalized market contagion. The intensification of financial turmoil in the euro area 

could spill over to the U.S. via a generalized increase in risk aversion and lower asset prices, even 

though safe haven flows would likely reduce yields on safe assets, thereby offsetting part of the 

rise in corporate bond spreads. While the changes in U.S. financial conditions that would occur 

under intensified euro area turmoil are highly uncertain, a bout of financial stress similar to that 

observed during the deterioration of the euro area crisis between July and November 2011 

could reduce U.S. real GDP by about 0.6 percentage point over two years.6

 Pressure on money market mutual funds (MMMFs). MMMFs have been major investors in the 

liabilities of euro area banks. Although the exposure of prime MMMFs to the core euro area has 

halved over the last year and its maturity shortened, it remains material. Distress in one of the 

large euro area banks to which the MMMFs are exposed could trigger a run on MMMFs, 

hampering wholesale funding conditions and with severe repercussions on the rest of the U.S. 

financial system as well as U.S. nonfinancial firms. 

 Deleveraging by EU banks. Credit conditions could potentially be affected by a sharper 

retrenchment of core euro area banks from their activities in the United States than observed so 

far. The April 2012 Global Financial Stability Report projected a reduction of some US$230 billion 

in the U.S. assets held by EU banks in its “weak EU policies” scenario. Although claims by EU 

banks on the United States did fall by $170 billion during 2011Q4 (the latest quarter for which 

data is available), this has not translated into a decline in U.S. bank credit; commercial and 

industrial loans continued to expand in 2011Q4 and 2012Q1, by about $30 billion and 

$45 billion, respectively. The reflects the fact the U.S. activities shed by EU banks have been 

picked up by U.S. banks or other foreign banks, as well as the fact that EU banks’ claims on the 

United States include loans extended to non-U.S. entities. 

 

6

 These estimates are based on simulations using a Financial Condition Index (FCI) for the United States. In particular, 

staff simulated a one standard deviation permanent shock to financial conditions, using a VAR-based FCI (Swiston, 

IMF/WP/08/161, 2008). The shocks were similar in size to the changes observed in the Summer/Fall of 2011 for stock 

prices, corporate spreads, the LIBOR, and oil prices. In this stylized scenario, the higher LIBOR rate and corporate 

bond yields, and lower equity prices would lower growth by 1 percentage point, but the fall in oil prices would 

cushion some of their effect and reduce the net impact to -0.6 percentage point. 
2012 ARTICLE IV REPORT UNITED STATES

12 INTERNATIONAL MONETARY FUND

 Stock market valuation for nonfinancial firms. U.S. multinational firms have substantial sales in 

the euro area, especially through local affiliates, and their profitability and stock market 

valuations are affected by euro area turmoil. 

16. The main domestic downside risk is that inaction driven by political gridlock could 

prevent or delay key policy decisions which are needed to support the recovery and restore 

fiscal sustainability. In particular: 

 Ongoing political gridlock could block an agreement on near-term tax and spending policies. If 

all temporary tax provisions were to expire and the automatic spending cuts to take effect, the 

2013 fiscal contraction would be very sizable 

(over 4 percent of GDP). This “fiscal cliff” 

would reduce annual growth to around 

zero, and the economy would contract in 

early 2013. Even if the “fiscal cliff” were 

quickly unwound, the damage to the 

economy could be substantial, especially if 

consumers and businesses were faced with 

continued uncertainty about tax and 

spending policies. These strong negative 

growth effects would in part reflect the 

limited effectiveness of monetary policy at 

the zero interest rate bound. Some 

anticipatory effects from the cliff could be 

felt already in late 2012, with spending held 

back by policy uncertainty—subtracting perhaps 1⁄2 percent from (annualized) growth in the 

second half of 2012 according to the Congressional Budget Office (CBO). 

 Moreover, the federal debt ceiling will need to be raised most likely in early 2013, bringing back 

the risk of heightened uncertainty and financial market disruption. Similar to the case of the 

“fiscal cliff”, there is clearly the potential for negative confidence effects and financial market 

reactions in anticipation of this event. 

 At the same time, failing to agree on a credible plan to put the federal debt on a sustainable 

medium-term path could lead to a gradual erosion of the reserve currency status of the U.S. 

dollar and put upward pressure on Treasury bond yields over the medium term―despite the 

deficit reduction measures already legislated, the public debt ratio remains on an unsustainable 

trajectory (Annex II). 

17. There are also upside risks, however, as pent-up demand could provide more support 

to the recovery. Specifically, capital investment can turn out to be stronger than in staff’s forecast, 

particularly in a less uncertain environment, given the strong balance sheets of non-financial 

corporations. A more positive outlook for the housing market could also be envisaged, with pent-up 

demand for housing and increased demand for rental units leading to a faster-than expected 

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2013

Composition of U.S. Fiscal Cliff 

(percent of GDP)

Sources: CBO and Fund staff estimates.

Spending 

Emergency sequester

unemployment 

benefits

Payroll tax cut

Other

Alternative Minimum

Tax (AMT)

Bush tax cuts (incl. 

interactions with 

AMT)
UNITED STATES 2012 ARTICLE IV REPORT 

INTERNATIONAL MONETARY FUND 13

recovery of housing starts than in our baseline scenario. Staff estimates that one hundred thousand 

additional housing starts by end-2013 could lead to an increase in GDP growth of 0.2 percent in 

2012 and 2013. And finally, a slower fiscal withdrawal than built in our baseline scenario would help 

lift growth, especially if embedded in a credible medium-term consolidation framework that 

removes policy uncertainty. 

POLICY DISCUSSION

Discussions focused on what the U.S. authorities could do to sustain the recovery and reduce the 

vulnerability to downside risks, while at the same time addressing key medium term challenges. In 

particular the discussion centered on the appropriate pace, timing, and composition of fiscal 

consolidation; the room and need for further monetary policy easing; the merit of additional measures 

to unclog the housing markets and reduce the risks from persistently high long-term unemployment; 

and the progress made over the last year in the reform of financial regulation and the remaining 

challenges ahead. 

A. Context 

18. The authorities agreed qualitatively with staff’s views on the outlook and risks, but 

saw greater upside potential for activity. They noted that the economic outlook underlying the 

President’s budget proposal for fiscal year (FY) 2013 

incorporated a higher amount of near-term fiscal 

stimulus than has been approved by Congress so far; 

the Administration would continue to propose these 

unapproved measures. They also noted that they are 

in the process of updating their projections for the 

FY2013 Mid-Session Review, expected to be released 

in July. The authorities were optimistic that private 

demand would rebound next year, highlighting 

elevated pent-up demand for consumer durables and 

housing that could materialize rapidly, and incipient 

signs of a recovery in housing activity and prices. They 

saw minimal risk of a materialization of the fiscal cliff 

in 2013, as they were confident that Congress would 

take the cyclical position of the economy into account when designing fiscal policy for 2013. As in 

previous consultations, the authorities considered staff’s medium-term outlook as excessively 

pessimistic. They saw the rise in unemployment from its pre-crisis levels as primarily a cyclical 

phenomenon, highlighting, nonetheless, that structural unemployment could rise in the absence of 

policy action. 

12

14

16

18

20

22

12

14

16

18

20

22

2005 2008 2011 2014 2017 2020

Authorities' Projection (OMB)

CBO, January 2012

Consensus, April 2012

Trend (2.5 pct growth, p.a.)

IMF

Comparison of Real GDP Forecasts

(trillions of chained 2005 dollars)

Sources: ConsensusForecasts; Congressional Budget 

Office; Office of Management and Budget; and Fund staff 

estimates.
2012 ARTICLE IV REPORT UNITED STATES

14 INTERNATIONAL MONETARY FUND

B. Fiscal Policy: Pace of Consolidation and Medium-Term Framework 

19. Staff and the authorities agreed that the adoption of a credible fiscal consolidation 

framework is crucial for stable medium-term growth. The Budget Control Act adopted in the 

summer of 2011 capped discretionary spending, but the Congressional Committee on Deficit 

Reduction subsequently failed to agree on additional deficit-reduction measures. As a result, savings 

in the form of deep automatic spending cuts (“sequester”) are scheduled to take effect starting from 

2013. The overall savings from the discretionary spending caps and sequester would be significant 

($2.1 trillion over 10 years), but still insufficient to stabilize the debt ratio (Figure 7).7

 Since the 

automatic spending cuts could disrupt government services and create an unwelcome drag on the 

weak recovery, staff suggested replacing them with specific, back-loaded measures generating an 

equal amount of savings. More broadly, policymakers should agree on an ambitious and 

comprehensive consolidation framework, which would stabilize the public debt ratio by 

mid-decade, and subsequently put it firmly on a downward path.8

 A medium-term primary surplus 

of at least 1 percent of GDP would help achieve this objective, even if interest rates were to rebound 

from their current low levels. The authorities noted that they have repeatedly put forth detailed fiscal 

consolidation plans, but a bipartisan agreement on a consolidation strategy would probably not 

materialize before the November 2012 elections. Staff reiterated its long-held view that the 

medium-term growth assumptions embedded in the administration’s fiscal proposals appear to be 

optimistic, and remain well above projections by the IMF, the CBO, and Consensus. 

 

7

 Federal debt held by the public is projected to increase from about 70 percent of GDP to around 85 percent of GDP 

in FY2022, with general government gross debt approaching 120 percent of GDP by CY2021. These projections 

assume implementation of legislated measures, additional, modest policy effort over the medium term, and 

continued low level of interest rates for several years. The Debt Sustainability Analysis in Annex II suggests that—in a 

downside scenario—policy slippages, negative growth shocks, and much higher interest rates could raise the general 

government debt ratio above 120 percent of GDP already within a 5-year horizon. 

8

 Last year’s Selected Issues Paper, Chapter VIII discusses possible institutional arrangements for this framework (IMF 

Country Report No. 11/202). 
UNITED STATES 2012 ARTICLE IV REPORT 

INTERNATIONAL MONETARY FUND 15

20. Staff noted that the consolidation effort will involve politically-difficult decisions on 

taxes and entitlement spending. Authorities emphasized that it is too early to predict the details 

of a possible bipartisan agreement on a comprehensive fiscal consolidation plan, not least because 

the contours of this plan would depend on the election results, but agreed that the plan will have to 

address both the spending and revenue sides of the budget. Staff stressed that with discretionary 

spending capped and defense outlays projected to fall significantly due to the withdrawal of troops 

from Afghanistan and Iraq, attention must shift to entitlements, the key driver of long-term 

spending. Given the size of the budget deficit, mandatory spending pressures, and the relatively low 

U.S. tax ratio, a medium-term consolidation plan would also need to raise revenues. The authorities 

acknowledged that bipartisan consensus on these issues has so far not been reached, but believed 

that previous negotiations (including in the context of the President’s Fiscal Commission) identified 

some common ground on which post-election negotiations could be based. 

21. Entitlement spending pressures reflect population aging and, in the health care sector, 

excess cost growth. They are mostly linked to the public health care programs (especially Medicare 

and Medicaid) and public pensions (Social Security). 

2011 2012 2013 2014 2015 2016 2022

-9.0 -7.5 -6.0 -4.5 -3.3 -3.3 -4.8

67.7 73.0 77.1 79.1 79.3 79.1 84.0

-5.4 -4.3 -3.0 -1.7 -1.1 -1.3 ...

102.8 106.7 110.7 112.7 113.0 113.0 ...

IMF staff recommended plan for stabilizing the public debt ratio 5/

-9.0 -7.5 -6.3 -5.1 -4.0 -2.6 -1.8

67.7 73.0 77.4 80.0 80.9 80.0 70.9

-5.4 -4.3 -3.4 -2.4 -1.4 -0.4 ...

102.8 106.7 111.2 113.8 114.4 113.4 ...

-8.7 -8.5 -5.5 -3.9 -3.4 -3.4 -2.8

-8.7 -7.6 -3.8 -2.3 -1.5 -1.4 -1.2

7/ CBO projection of the federal budget balance under current law, March 2012.

“Fiscal cliff” scenario (CBO) 7/

Sources: IMF staff estimates; OMB; and CBO.

1/ Projections using the IMF macroeconomic assumptions. Compared with the President's budget proposal, staff assumes a lack of 

action by Congress on the administration’s stimulus proposals, delayed and partial implementation of new revenue-raising 

measures, and an extension of emergency unemployment benefits into 2013.

2/ Includes staff's adjustments for one-off items such as TARP valuation changes.

3/ Excludes net interest, effects of economic cycle, and costs of financial sector support. In percent of potential nominal GDP.

6/ President's budget proposal, February 2012.

4/ Includes state and local governments, figures are on a calendar year basis.

5/ Assumes structural primary withdrawal of about 1 percent of GDP annually until a primary balance of 1 percent of GDP for 

general government is reached in 2018. Further effort will be required in the medium term to bring the debt ratio closer to precrisis levels.

(Percent of GDP, Fiscal Years for Federal and Calendar Years for General Government)

Federal budget balance (authorities) 6/

United States: Federal and General Government Finances

IMF staff projection 1/

Federal budget balance 2/

Federal debt held by the public

General government debt 4/

General government structural primary balance 3/ 4/

Federal budget balance 2/

General government structural primary balance 3/ 4/

Memorandum items

Federal debt held by the public

General government debt 4/
2012 ARTICLE IV REPORT UNITED STATES

16 INTERNATIONAL MONETARY FUND

 Health care. The authorities have continued to implement the 2010 health care reform. Notably, 

the CMS Innovation Center has launched a number of pilot programs intended to find new 

approaches to the delivery and payments for health care. Staff agreed with the authorities that 

these initiatives potentially hold the promise of slowing cost growth in the longer term, and 

urged their aggressive implementation.9

 The authorities acknowledged delays in setting up 

state-level health insurance exchanges 

ahead of their scheduled launch in 2014, 

but thought that the federal government 

had sufficient legal authority and 

resources to set up insurance exchanges 

in those states that are lagging behind.10

More broadly, the Supreme Court ruling 

on the Affordable Care Act might provide 

new impetus for reform implementation, 

by removing any lingering legal 

uncertainties.11 Staff suggested that given 

the scale of medium-term budgetary 

challenges, consideration could be given 

to additional saving measures in the 

health care sector, such as raising fees, 

tightening eligibility (for example, raising the Medicare eligibility age), and trimming healthrelated tax expenditures which tend to be highly regressive (Selected Issues Chapter V). The 

authorities noted that their budget proposal envisages substantial new health care-related 

savings (about $360 billion over 10 years), although the measures directly affecting beneficiaries 

are backloaded toward the end of decade. 

 Public pensions. In staff’s view, Social Security imbalances warrant an early parametric reform, 

such as a modest increase in the retirement age, a modified benefit structure to further increase 

progressivity, and a higher annual ceiling for Social Security contributions. According to a recent 

report by the Social Security Trustees, the combined Social Security trust funds could run out of 

resources in 2033—three years earlier than projected last year—at which point elimination of the 

funding shortfalls would require a 25 percent cut in scheduled benefits. Considered separately, 

the Disability Insurance trust fund will be depleted already in 2016. A specific reform proposal

 

9

 The existing CMS experiments and demonstration projects include expanding primary care to help prevent costly 

procedures; providing incentives for changes in the delivery process through bundled payments; improving 

coordination of care through the Accountable Care Organizations and for dual Medicare-Medicaid enrollees. These 

initiatives affect about 50,000 health care providers. 

10 The state-level insurance exchanges (or market places), are meant to facilitate the expansion of insurance 

coverage, including by helping consumers find plans personalized to their specific health conditions and budgets, 

promoting insurance transparency and accountability, and facilitating the delivery of insurance subsidies. 

11 The June 2012 Supreme Court ruling upheld most of the Affordable Care Act provisions, although the Court 

limited the ability of federal government to mandate Medicaid expansion at the state level. 

0

5

10

15

20

0

5

10

15

20

1970 1985 2000 2015 2030 2045 2060 2075

Medicare, Medicaid,

Exchange Subsidies,

and CHIP Outlays

(CBO projection,

June 2012)

Social Security 

Outlays (CBO 

projection, June 2012)

Outlays on

discretionary programs

(OMB projection, Feb 2012)

Long-Term Spending Trends

(percent of GDP)

Sources: Congressional Budget Office and Fund staff estimates.

Note: Outlays for Medicare are on the net basis including 

offsetting receipts.
UNITED STATES 2012 ARTICLE IV REPORT 

INTERNATIONAL MONETARY FUND 17

was not included in the President’s February budget, but the President has called on Congress to 

engage in bipartisan talks to put Social Security on a more sustainable footing. 

22. Revenues could be raised through a broad menu of options, including lower tax 

expenditures, the introduction of a VAT and carbon taxes (Box 4), and higher marginal 

personal income tax rates. Curbing personal 

tax expenditures (which amount to some 

7 percent of GDP) within a fundamental tax 

reform package would be growth- and 

distribution-friendly, as spending through the 

tax code disproportionately benefits highincome households (Selected Issues Chapter V). 

Authorities indicated that they have repeatedly 

proposed to let the Bush tax cuts for highincome taxpayers expire, and to limit tax 

deductions for these taxpayers. More broadly, 

the tax reform debate could gain traction next 

year. Staff noted that there is also room for 

improving the structure of corporate taxation, 

including broadening the base, lowering marginal rates (the United States has the highest statutory 

corporate tax rate in the OECD), and achieving a more efficient tax treatment of multinational 

enterprises. When designing these reforms, however, staff noted that appropriate consideration 

should be given to their possible international spillovers, especially from changes in the taxation of 

foreign activities by U.S. corporations (Selected Issues Chapter VI discusses implications of 

alternative options, including the President’s framework for corporate tax reform unveiled in 

February). 

23. Staff called for a measured pace of deficit reduction given the persistent weakness in 

economic activity. Authorities and staff concurred that the medium-term risks from persistentlyhigh deficits and growing debt need to be weighed against the risks of too rapid a withdrawal, 

although staff saw the optimal pace of consolidation as more gradual than proposed in the 

President’s FY2013 budget. The President’s budget proposal envisages a reduction in the federal 

deficit by 3 percent of GDP in FY2013 (from 81⁄2 percent to 51⁄2 percent of GDP) due to expiring 

stimulus, revenue-raising measures, and some defense savings. The authorities felt that this pace of 

consolidation is consistent with their expectations of a substantial pickup in private demand. 

According to the CBO, even if the proposed budget policies were implemented in full, the pace of 

fiscal adjustment would likely be smaller.12 Staff suggested that, given the weak outlook and 

downside risks, targeting a federal deficit of about 61⁄4 percent of GDP for FY2013—some 

 

12 Specifically, the CBO estimates that the President’s budget proposal would imply only a 2 percent of GDP 

adjustment, in part because the budget overstates spending this year. In addition, Congress has not acted upon 

certain stimulus proposals by the Administration; if these were to be implemented, the FY2013 withdrawal could be 

lower than 2 percent of GDP. 

0.0 0.3 0.6 0.9 1.2

Deductibility of Charitable 

Contributions (Ex. Education 

and Health)

Deductibility of Certain State 

& Local Taxes

Deductibility of Mortgage 

Interest

Exclusion of Employer 

Contributions for Health Care

Selected Personal Income Tax Expenditures

(percent of GDP)

Source: Office of Management and Budget.
2012 ARTICLE IV REPORT UNITED STATES 

18 INTERNATIONAL MONETARY FUND

3⁄4 percentage point of GDP higher than planned in the President’s budget proposal—would be 

appropriate. This would be consistent with a reduction in the general government structural primary 

deficit of around 1 percent of GDP in calendar year 2013. The deficit reduction should be as growthfriendly as possible. Potential spending measures to prioritize include infrastructure spending, 

training programs to limit skill mismatches, and housing initiatives (all of which were proposed by 

the Administration), as well as a further extension of emergency unemployment benefits. The 

authorities noted that the discussion of fiscal policies in Congress will be very much influenced by 

the cyclical position of the economy, and that policymakers generally agree that the budget deficit 

should not be reduced too quickly if the outlook remains weak. 

24. State and local governments (SLGs) have continued their fiscal adjustment, but they 

need to rebuild buffers and reduce contingent liabilities. The fiscal retrenchment triggered by 

the balanced-budget rules and a phase-out of federal aid continued last year, with the SLGs 

subtracting about 1⁄4 percent from GDP growth. State and local employment have recently shown 

signs of stabilization, but the authorities cautioned that local governments continued to face risks 

from the weak housing market and property tax collections, and could weigh on growth for some 

time. The rebuilding of rainy-day funds stopped this fiscal year, and while most states plan to make 

some progress with rebuilding buffers during FY2013, the reserves in about half of the states remain 

well below prudent levels, making the SLGs susceptible to spending cuts should revenues surprise 

on the downside (Figure 8). A number of states have taken action to trim contingent liabilities from 

the pension and health care obligations to their employees (in some cases supported by favorable 

court rulings), but these liabilities generally remain sizeable. The authorities hoped that the 

forthcoming modification of the GASB standards would create further incentives for the SLGs to 

address unfunded pension liabilities, estimated by private analysts in a wide range of $1–4 trillion.13

C. Monetary Policy 

25. The discussion on monetary policy focused on whether the outlook and risks justified 

further easing. Staff and the authorities agreed that the Fed’s unconventional monetary policy 

actions since the crisis had supported economic activity and hedged against deflationary risks, 

helping to keep inflation expectations well anchored. In the discussions, which occurred before the 

June 20 easing action, staff argued that the slow pace of reduction in unemployment under its 

baseline and the escalation of downside risks may call for further easing in the second half of this 

year. The authorities noted that risk management considerations could argue in favor of this course 

of action—like staff, they saw the risks to the outlook as being tilted to the downside, and argued 

that the costs and policy challenges associated with the materialization of downside risks would 

probably be larger than those associated with the outlook turning stronger than expected. At the 

same time, the authorities and staff recognized that there were costs and risks associated with 

providing additional policy accommodation, and that the very low level of long-term interest rates 

 

13 Last year’s Selected Issues Paper VII (IMF Country Report No. 11/202) provides a discussion of SLG finances. 
UNITED STATES 2012 ARTICLE IV REPORT 

INTERNATIONAL MONETARY FUND 19

might suggest that the benefits that can be achieved by further monetary policy accommodation 

are limited. 

26. The authorities argued that further easing actions would be effective even in the 

absence of severe market dislocation. Staff noted that that both Operation Twist and the forwardguidance announcements had lowered long-term yields, but argued that asset purchases may have 

a greater impact in unsettled financial market conditions—that is, when arbitrage is imperfect, 

liquidity premia are high, and risk spreads are elevated. The authorities agreed that the Fed’s first 

large-scale asset purchase program, introduced under severely dislocated markets, had eased 

financial conditions very substantially, but noted that the subsequent, smaller-sized programs had 

also been effective, even if they were not introduced in particularly stressed conditions. 

27. Staff and the authorities agreed that easing actions would have a positive effect on 

activity even if frictions in the mortgage market have weakened the monetary transmission 

mechanism. Lack of competition and capacity constraints among servicers have reduced the passthrough of lower MBS yields into lower mortgage interest rates. Moreover, many households with 

high-loan-to-value mortgages could not refinance at the lower rates and many homebuyers were 

unable to obtain new mortgages due to tighter lending standards. Despite these frictions, staff and 

the authorities agreed that the effect of lower longer-term yields on aggregate demand remained 

positive. Moreover, the lessened sensitivity of economic activity to longer-term interest rates could 

call for more rather than less action to ease monetary conditions. In addition, the authorities noted 

that monetary policy operates through multiple channels—interest rates and the cost of capital 

being only one of them. 

28. There was agreement that a number of tools could be used for further easing, with 

staff arguing that additional MBS purchases would be a particularly promising option. Staff 

argued that in view of the high share of long-maturity Treasury securities held by the Fed and the 

importance of the housing sector to the outlook, further net MBS purchases could be another 

effective option. The authorities agreed that further net MBS purchases could be helpful in some 

circumstances, but also noted a tension between providing accommodation through further MBS 

purchases and the desire by the FOMC to return, over time, to an all-Treasury securities portfolio. 

There was also agreement between staff and the authorities that the effectiveness of MBS purchases 

or other forms of monetary easing in supporting growth would be enhanced if policy actions and 

proposals to expand access to mortgage refinancing were to gain further traction. 

29. Should global financial turmoil intensify, the Fed could intervene with emergency 

liquidity facilities to mitigate the risks of severe financial disruption. The authorities noted that 

dollar liquidity swap lines with foreign central banks, authorized by the Fed through February 2013, 

are already in place to help ease strains in dollar funding markets. Authorities noted that the Fed’s 

ability to provide institution-specific support is limited under the Dodd-Frank Act (DFA), but that it 

retained the authority to establish broadly-available liquidity facilities to help stabilize funding 

conditions for financial institutions if appropriate. 
2012 ARTICLE IV REPORT UNITED STATES 

20 INTERNATIONAL MONETARY FUND

D. Housing Policy 

30. The authorities noted that the series of measures taken since last year to support the 

housing market were starting to bear fruit. These measures include in particular an expansion of 

the Home Affordable Refinancing Program 

(HARP) for loans owned or guaranteed by the 

GSEs, and a strengthening of the Home 

Affordable Modification Plan (HAMP), including 

loosened eligibility criteria through the 

elimination of debt service-to-income cutoffs, 

and the tripling of incentives for investors to 

carry out principal reductions under HAMP’s 

Principal Reduction Alternative (PRA) (Box 5). 

Recent data suggests that the October 2011 

expansion of HARP seems to have led to a 

significant increase in HARP refinancing. The 

share of loans that have benefited from a 

principal reduction under the modification program (Home Affordable Modification program of 

HAMP) has also been on the rise, and early signs show that the tripling of the incentives for principal 

reductions is receiving interest from investors, and is likely to spur further principal reductions in the 

future. The recent State Attorneys General Settlement with the major banks, which resolved claims 

about improper foreclosures and abuses in servicing the loans, could lead in the medium run to a 

non-trivial reduction in foreclosures, including through up to $34 billion of principal reduction. Early 

signs indicate that the settlement has led banks to delay foreclosures and also to increasingly 

substitute them with “short sales” of underwater properties, which are less costly and count toward 

the banks’ commitment for principal reduction under the settlement.14 The authorities highlighted 

that greater reliance on short sales, as opposed to foreclosures, could support the housing market 

going forward. 

31. The mission welcomed this progress, but also noted that more aggressive policy 

action may be warranted to accelerate the resolution of the housing crisis. As noted in the 

Fed’s November 2011 white paper, housing markets do not self-correct efficiently and, absent 

forceful policies to support the market, prices could fall below their equilibrium levels due to 

feedback loops from prices to demand and supply. If house prices are anticipated to decline, 

potential buyers could stay out of the market even if interest rates are low. Moreover, a decline in 

prices reduces housing equity, triggering further defaults and foreclosures. Foreclosures, in turn, put 

renewed downward pressure on prices, not only by adding to the supply of houses for sale, but also 

 

14 A short sale consists of the sale of an underwater property by the homeowner after an agreement with the lender. 

The lender obtains the sale proceeds but releases its lien even though sale proceeds are below the value of the 

outstanding mortgage. Compared to foreclosures, short sales typically lead to smaller discounts in the property 

value. They are also likely to exert a smaller negative externality on the value of neighboring properties. 

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12

0

2

4

6

8

10

12

14

16

18

20

HARP Refinancings and Share in Total

HARP loans for

LTV > 105 - 125%

(units; LHS)

HARP loans for 

LTV > 80 - 105%

(units; LHS)

Share of HARP in total GSE Refi

(percent; RHS)

Source: Haver Analytics.
UNITED STATES 2012 ARTICLE IV REPORT 

INTERNATIONAL MONETARY FUND 21

because they lead to a destruction of value and impose “deadweight” losses on the economy, 

hurting consumer wealth and credit availability.15

32. Staff noted that further policy measures could help speed up the recovery of the 

housing market, while recognizing that there is no silver bullet. These could include: 

 Supporting mortgage modifications. Staff sees foreclosure mitigation policies—including 

through mortgage modifications—as a key priority. Possible ways to strengthen and expand 

mortgage modifications include the participation of the GSEs in the principal reduction program 

and a forceful implementation of the recent expansion of HAMP, including by providing 

appropriate incentives to servicers to ensure their full participation.16 Staff also noted the 

potential usefulness of shared appreciation mechanisms, which allow lenders and borrowers to 

share the benefits from future house price increases and could therefore lead to higher 

participation by investors in principal reductions. The authorities indicated that the FHFA, the 

independent conservator of the GSEs, is currently considering the participation of the GSEs in 

HAMP-PRA, and noted that under the recently-announced increase in investor incentives under 

HAMP-PRA, the GSEs are encouraged to participate and benefit from the same incentives as 

private investors. The authorities recognized that the incentive misalignment between servicers 

and investors has been a barrier to further principal reductions, but noted that an existing 

program tackles the second-liens problem by forcing participating second-lien holders to 

reduce the principal on the second liens by an equal proportion to the first lien. In addition, 

incentives for extinguishing principal on second-lien modifications were increased to further 

encourage second-lien principal reductions. The authorities agreed on the usefulness of sharedappreciation mechanisms, but argued that technical constraints might make them hard to 

implement.

 Supporting refinancing on a larger scale. Current refinancing volumes are not in line with the 

historically low mortgage rates. The barriers to refinancing have clogged the monetary 

transmission mechanism, which would have otherwise allowed high-propensity-to-consume 

households to save on their monthly payments, also reducing their risk of delinquency. While 

the recent expansion of HARP is allowing more underwater GSE loans to refinance, staff noted 

that more could be done to boost refinancing, along the lines of recent proposals by the 

Administration. These proposals include an easing of the frictions that hinder cross-servicer 

refinancing and an expansion of the program to non-GSE borrowers (Box 5). Authorities noted 

that these measures are contained in three bills that have been recently introduced in Congress. 

 

15 It is estimated that foreclosed properties sell at around a 27 percent discount and lower the value of neighboring 

properties by around 2 percent. 

16 Currently, the incentives of servicers are not always aligned with those of investors. Many modifications that would 

increase the net present value (NPV) of mortgages for investors are not carried out by servicers due to high 

modification costs, and, in some cases, reluctance by servicers due to their significant holdings of second liens. When 

servicers hold a second lien on the property in delinquency they have an incentive to avoid modifications since it 

would also lead to losses on their second liens. 
2012 ARTICLE IV REPORT UNITED STATES 

22 INTERNATIONAL MONETARY FUND

 Facilitating the conversion of foreclosed properties into rental units. The recent pilot 

program by the FHFA to facilitate the transition of foreclosed houses into rental units would 

help reduce the negative impact of foreclosures on house prices by averting distressed sales. 

Staff and authorities agreed on the benefits from a timely expansion of this program, especially 

given buoyant rents, but authorities noted technical challenges in the implementation that are 

likely to lead to delays. 

 Allowing mortgages to be modified in personal bankruptcy courts (the so called 

“cramdowns”). Implementing this long-standing Fund recommendation would make the 

treatment of primary residences in personal bankruptcies consistent with that of most other 

types of secured debt and create incentives for voluntary modifications, at no fiscal cost 

(Selected Issues Chapter VII). Authorities acknowledged staff’s arguments on cramdowns but 

noted the lack of sufficient political support for this measure. 

E. Challenges Facing the Labor Market 

33. Staff and authorities agreed that while cyclical factors explain most of the ongoing 

labor market weakness, there is a risk that structural unemployment may increase in the 

absence of policy action. The long-term unemployment rate, at 3.5 percent of the labor force, is 

well above levels in previous recessions and has declined relatively little since the start of the 

recovery. Elevated long-term unemployment raises the risk of a loss of human capital and 

attachment to the labor force, and could lead to a lower participation rate or higher NAIRU in the 

medium term. Staff also noted that the apparent shift in the Beveridge curve for some industries—in 

particular, manufacturing—may suggest mismatches between the skills available among the 

unemployed and the skills sought by employers. 

34. Authorities observed that a number of measures have been recently adopted to boost 

employment, while others have been proposed. The Job Creation Act of February 2012 

introduced an extension of the payroll tax cuts through 2012 and the requirement that recipients of 

long-term unemployed benefits take up job search services, as well as training and education 

services. Other measures to support the labor market by boosting labor demand through tax 

incentives and helping the unemployed in their job search effort have been proposed by the 

Administration but have not been approved by Congress. For example, the President’s American Job 

Act of 2011 envisaged a one-year reduction in the portion of the payroll tax paid by employers for 

incremental increases in their payrolls, and a $4,000 credit to employers for hiring long-term 

unemployed workers. And the 2013 Budget proposed both active labor market policies, including 

the Pathways Back to Work program that help low-income youth and long-term unemployed by 

subsidizing their employment; and a 10 percent tax credit for new jobs and wage increases. 

35. Staff was supportive of these measures, and suggested that tax incentives could be 

better targeted at employment creation and more resources devoted to programs that help 

the long-term unemployed return to work. Staff suggested that tax incentives aimed at the longterm unemployed deserve more consideration, given these individuals’ higher risk of human capital 

losses. In light of the protracted weakness in labor market conditions, staff also cautioned against an
UNITED STATES 2012 ARTICLE IV REPORT 

INTERNATIONAL MONETARY FUND 23

abrupt reduction of the maximum duration of extended unemployment benefits, as these provide 

an important social safety net. Ensuring adequate funding for active labor market policies, such as 

training and support for job search, would also be critical, as these measures have been shown to 

improve the employment prospects of long-term unemployed workers. Resources in this area are 

generally lower in the United States than other OECD countries, and have fallen since 2007 as a ratio 

to the long-term unemployed. 

F. Financial Sector Conditions and Policies 

36. The authorities saw the outlook for the U.S. banking system as broadly positive. They 

noted that earnings growth for the U.S. banking sector has been positive over the last 11 quarters, 

and losses and bank failures have peaked in late 2010. However, a few States (Arizona, California, 

Florida, Georgia, and Nevada) continue to suffer from higher rates of bank failures, reflecting 

exposures to weak house prices and construction activity, in particular commercial real estate. 

Authorities indicated that banks continue to report weak loan demand from small and medium 

enterprises (SMEs), reflecting both the weak demand environment faced by these firms and the 

decline in available collateral following the housing bust, given that SMEs tend to secure a large 

share of liabilities with real estate. They also said that the supply of mortgage credit was still tight as 

evidenced, for example, by the Fed’s Senior Loan Officer Opinion Survey, which shows almost no 

easing of mortgage standards since the crisis. The large backlog of troubled mortgages, regulatory 

uncertainty, and scaled-down real estate lending operations are weighing on banks’ willingness and 

ability to supply mortgage credit. 

37. However, U.S. banks face risks from an intensification of stresses in global financial 

markets. While agreeing that the banking system has made significant progress since the depth of 

the recession (Box 3), staff expressed concerns about the potential vulnerabilities of the largest U.S. 

banks to financial market stresses emanating from turmoil in the euro area, in light of their large 

derivative portfolios (including with counterparts in the euro area) and relatively high dependence 

on wholesale funding. The increase in CDS spreads for the largest U.S. banks over the past few 

months could indeed reflect concerns about contagion from renewed global financial market 

turmoil.17 The authorities noted that the stress testing from the second Comprehensive Capital 

Analysis Review (CCAR) gave reassuring indications on the resilience of the largest U.S. banks to very 

severe shocks. They agreed that severe shocks affecting large core euro area banks would 

unavoidably have negative repercussions for U.S. financial institutions, given their size and 

interconnectedness, but noted that the protracted period of turbulence had afforded U.S. 

institutions time to adjust their exposures and prepare contingency plans. They also indicated that 

the upward movements in CDS spreads for major U.S. banks may reflect investors hedging against 

 

17 Self-reported data on the six largest U.S. banks (Bank of America, JPMorgan, Citigroup, Morgan Stanley, Goldman 

Sachs and Wells Fargo) suggest that their aggregate net exposure to peripheral Europe (taking into account the 

protection purchased and the full set of collateral) was about US$57 billion at end 2011. But the counterparty risk 

behind these exposures remains a concern, considering that about 75 percent of all CDS trading globally is 

concentrated amongst 20 major banks/brokers that include the five major U.S. banks. 
2012 ARTICLE IV REPORT UNITED STATES 

24 INTERNATIONAL MONETARY FUND

the risks of greater stress in global financial markets by purchasing CDS of U.S. banks, as their 

valuations are highly sensitive to changes in global economic conditions. 

38. Authorities noted that activity in segments of the shadow banking system is still 

depressed, and unlikely to return to pre-crisis levels in the foreseeable future.

 The MMMF asset base—US$2.5 trillion—is about one third below its end-2008 peak. Authorities 

and staff agreed that runs on MMMFs following distress in one of the large euro area banks 

remain a potential risk, even though prime MMMFs have halved their exposure to the core euro 

area to about US$215 billion in May 2012 and shortened its duration. 

 Almost four years after the peak of the financial crisis, private-label securitization remains well 

below its pre-crisis level. In particular, issuance of CDOs has evaporated while private-label 

RMBS issuance has slowed to a trickle, which 

the authorities attributed to the still-weak 

housing market, unresolved regulatory reforms 

(including risk retention rules, as discussed 

below in paragraph 41), and tight credit rating 

standards for structured paper. 

 Staff asked whether the recent decision of a 

few foreign broker-dealers to give up their U.S. 

bank holding group status could presage an 

expansion of the U.S. shadow banking system, 

as a reaction to the ongoing process of 

regulatory reforms. Authorities noted that 

these entities would still be subject to 

supervision in the United States by the 

Securities and Exchange Commission (SEC) (as 

well as from their home bank regulators), and they could still be required to adopt higher capital 

standards through their designation as SIFIs. They would also be subject to the Volcker Rule, as 

long as their parent institution has a U.S. bank branch, agency, or subsidiary. 

39. Staff underscored the challenges posed by the low interest rate environment for 

insurance companies and defined-benefit pension funds. Authorities noted that low interest 

rates may present challenges for corporations with defined-benefit pension plans, as they boost the 

present value of future pension liabilities. The official estimate of corporate pension underfunding 

was about $700 billion as of 2010, concentrated in industries such as airlines, auto, and steel. 

According to the Society of Actuaries, employers have generally funded their plans in advance of 

requirements, but the rising tide of required contributions in the coming years could create 

difficulties for weaker companies.18 With regard to the insurance industry, the authorities noted that

 

18 After the end of consultation, Congress passed legislation that effectively eases the contribution requirements. 

0

500

1000

1500

2000

2500

3000

0

500

1000

1500

2000

2500

3000

2000 2002 2004 2006 2008 2010

CDO2 CDO

CMBS RMBS

ABS

Issuance of Structured Products by Type

(billions of U.S. dollars)

Sources: Fund staff estimates based on data from JPMorgan 

Chase & Co., Board of Governors of the Federal Reserve 

Systems, the CRE Finance Council, and Inside Mortgage 

Finance.

Note: ABS = asset-backed security; CDO = collateralized debt 

obligation; CDO2 = CDO-squared and CDOs backed by ABS 

and MBS; MBS = mortgage-backed security; RMBS = 

residential MBS; CMBS = commercial MBS.
UNITED STATES 2012 ARTICLE IV REPORT 

INTERNATIONAL MONETARY FUND 25

the 2011 stress tests were reassuring, as insurance companies would maintain adequate capital 

ratios even if interest rates stayed low for long. A greater challenge could come from a spike in 

global financial stress: while the exposure to Europe and derivatives is not substantial, downgrades 

of counterparties in derivative contracts could result in the specific contracts being out of 

compliance with a specific state’s derivative use laws, in which case the insurer may be required to 

take action, such as unwinding the contract or novating the contract to a counterparty that is in 

compliance.

40. Over the last year, continued progress has been made on the implementation of the 

financial reform program, in line with the Dodd-Frank Act and the international regulatory 

reform agenda. The authorities emphasized that implementing the reforms had been a daunting 

process, given the volume of rulemaking to be completed in a relatively short period of time and 

with limited resources. These difficulties, together with the authorities’ desire to “get things right”, 

taking proper account the concerns raised by financial market participants, foreign authorities, and 

the public during the consultation process were the main reasons for the delay in finalizing and 

implementing parts of the DFA and global financial reforms. Still, progress was achieved in the 

following areas, in many cases following the recommendations contained in the 2010 FSAP (Box 6): 

 Systemically important financial institutions (SIFIs). Final rules have been issued on the 

submission of resolution plans (“living wills”) for SIFIs, and the criteria behind the designation of 

non-bank SIFIs and Financial Market Utilities (FMU) for enhanced supervision and prudential 

standards. Initial rulemakings to implement the orderly liquidation authority, which enables the 

FDIC to place SIFIs into receivership, have been promulgated, and further rulemaking is in 

progress. The authorities indicated that the designation process for FMUs is almost complete, 

while that for non-banks is still at an earlier stage. Staff underscored the importance of 

accelerating the process, as the actual designation of firms and the enhanced regulatory scrutiny 

would further help identify and address systemic risk challenges. 

 OTC derivatives. Authorities have laid the groundwork for new regulations imposing mandatory 

centralized clearing and improving transparency in OTC derivative markets, in line with the 

Dodd-Frank Act and G20 commitments. While a number of rules have yet to be finalized, 

authorities emphasized that reforms in this area need to be coordinated internationally, and that 

the United States is closer to the implementation of new regulations on OTC derivatives than 

other jurisdictions. Staff encouraged the authorities to finalize the rules as quickly as possible, 

given the critical role played by the U.S. financial sector in global derivatives markets. Authorities 

and staff agreed on the need to have strong supervision of Central Counterparties (CCPs), and 

that systemically important CCPs should have access to Fed liquidity facilities in appropriate 

circumstances. 

 Basel rules. Final rules have been issued requiring banks to increase their capital buffers for the 

trading book and securitization activities, broadly following Basel 2.5 requirements (U.S. banks 
2012 ARTICLE IV REPORT UNITED STATES 

 

26 INTERNATIONAL MONETARY FUND

continue to report capital ratios under Basel I).19 Initial rulemaking proposals have been issued 

requiring banks to hold greater and higher quality capital buffers, in line with Basel III 

requirements. The authorities were confident that the final rule on these standards would be 

issued around the timeline agreed with the Basel Committee (January 2013), and noted that 

most major U.S. banks are on track to meet the new requirements. Authorities also indicated 

that the Dodd-Frank Act’s provision on greater capital buffers for systemically important banks 

(with assets above $50 billion) will be implemented at the same time as the capital surcharge for 

the Global Systemically Important Banks (G-SIBs) (between 2016 and 2018). While the 

implementation of the two Basel liquidity standards will not begin until 2015 for the Liquidity 

Coverage Ratio and 2018 for the Net Funding Stable Ratio, the U.S. authorities are working at 

initial rulemaking proposals on both standards. Staff welcomed the progress and encouraged 

the authorities to further advance in the rulemaking needed to fully implement the Basel III 

framework in line with the internationally agreed timeline. 

41. The discussion also focused on areas where more remains to be done to increase the 

resilience of U.S. financial system: 

 Regulation of the shadow banking system: Authorities and staff agreed that one area where more 

progress is needed is the regulation of money market mutual funds. Given the size of this 

industry, its prominence in short-term funding markets, and its susceptibility to runs, 

strengthening the regulation of MMMFs is critical to enhance financial stability, especially as the 

emergency facility used during the financial crisis to backstop the market is no longer available. 

The menu of options to mitigate the risks posed by the MMMFs includes moving from stable to 

floating net asset values, and imposing capital requirements and redemption limits. Authorities 

and staff also concurred on the need to reduce the systemic risk stemming from the 

dependence of the tri-party repo market on intraday credit provided by the clearing banks, 

following the recommendation of the tri-party repo task force. 

 Volcker rule. Staff noted that a ban on proprietary trading could in principle reduce the risk of 

significant losses on banks’ derivatives positions, which has been drawing renewed attention 

after the recent events involving JP Morgan. But in staff’s view the effectiveness of this ban 

would depend on striking the right balance between too rigid an interpretation of the law—

which could trigger a migration of risky activities outside the regulatory perimeter—and an 

expansive interpretation of the exemptions envisaged by the statute, which could dilute it. At the 

same time, it is important to minimize the potential adverse international spillovers of the law, as 

well as its impact on market liquidity more generally. Authorities indicated that they are very 

mindful of the concerns expressed by foreign authorities and markets, and that an appropriate 

 

19 The final U.S. regulation on Basel II requirements (which became effective in 2008) fell short of fully adopting Basel 

II standards, as it only required large U.S. banks adopt the so-called “advanced” approach for the calculation of riskweighted assets. To-date core banks remain in a transitory regime where they run both Basel I and Basel II 

calculations, but Basel I capital requirements remain the legal minimum. 
UNITED STATES 2012 ARTICLE IV REPORT 

INTERNATIONAL MONETARY FUND 27

definition of market-making activities (allowed under the statute) should address most of these 

concerns. 

 Insurance regulation. Staff reiterated their long-standing view that the lack of a national 

regulatory framework for the industry could be an issue, given the difficulty in coordinating the 

various state regulators on both domestic and international reform efforts. The authorities 

pointed to the establishment of the Federal Insurance Office (FIO) at the Treasury as a significant 

step forward, given FIO’s mandate and emerging capacity to coordinate federal effects and 

develop federal policy on prudential aspects of international insurance matters. 

 Mortgage market reforms. Staff noted that, 16 months after the issuance of the initial rulemaking 

proposal, it is important to expeditiously complete the regulation requiring banks that securitize 

loans to retain a share of the risk, as this would remove uncertainty weighing on the recovery of 

private securitization. Authorities noted that regulatory agencies are working on finalizing the 

risk retention rules. Under the law, a bank will have to retain an ownership interest in any 

mortgage it securitizes if that mortgage does not meet the new requirements of a Qualified 

Residential Mortgage. The CFPB is still carefully reviewing the comments received on the 

Qualified Mortgage (QM) proposed rules, which would impose mortgages underwriting 

standards that ensure borrowers have the ability to repay. While staff argued that the 

uncertainty related to risk retention and QM rules may be negatively affecting mortgage 

lending, authorities noted that other frictions may hurt banks’ appetite for mortgage lending, 

including capacity constraints and risks stemming from representations and warranties. 

 The future of the GSEs. Staff noted the importance of striking the right balance between the need 

to support the recovery of the housing market and to enact structural reforms of the housing 

finance system over the medium term featuring a much reduced role for the GSEs (as envisaged 

in a 2011 Administration report to Congress—Box 7). The authorities noted the need to achieve 

broad consensus on these reforms, which they saw as high priority for after the upcoming 

elections. They also noted that the FHFA had recently issued a strategic plan outlining the next 

phase of the conservatorships of the GSEs. Staff and authorities agreed on the need for a 

medium-term strategy to reduce the role of GSEs, which may encourage a gradual shift in the 

mortgage market towards private institutions, helping resolve some of the uncertainty weighing 

on the housing market. 

42. Staff and authorities agreed that ensuring financial stability would require strong 

oversight of systemic risk. Staff noted that, as the U.S. regulatory architecture remains highly 

fragmented, it is essential to ensure strong coordination among its various agencies, in order to 

identify and act on early signals of a build-up of systemic risk. The authorities agreed, but noted that 

the Financial Stability and Oversight Council (FSOC) had greatly improved coordination and 

cooperation among agencies, as their representatives meet frequently within the FSOC’s various 

sub-committees and working groups. They also indicated that the Office of Financial Research can 

play a useful role in this regard, including by allowing agencies to access a centralized database on 

financial institutions’ positions and exposures, and developing a dashboard for systemic risk 

indicators. 
2012 ARTICLE IV REPORT UNITED STATES 

28 INTERNATIONAL MONETARY FUND

43. Rapid completion and effective implementation of the new regulations requires 

adequate funding for the regulatory and supervisory agencies. Authorities noted that agencies 

continue to experience budgetary constraints which limit their ability to meet the deadlines 

associated with the domestic and international reforms. Going forward, a lack of adequate resources 

may hinder the ability of the agencies to effectively monitor financial institutions and markets, once 

the new regulations come into force. Staff argued that lifting these resource constraints should be a 

priority. 

G. The United States and the World Economy 

44. Staff stressed that policy actions to raise savings over the medium term, including by 

restoring fiscal sustainability, and to strengthen the recovery in the short term would make 

important contributions to global growth and stability. With household saving rates projected 

to remain close to current levels in the medium term, higher public savings would help ensure that 

the U.S. current account deficit remains moderate as domestic investment gradually recovers. While 

current external vulnerabilities are limited by the dollar’s reserve currency status and the United 

States’ role as safe haven, restoring fiscal sustainability would also reduce potential future risks to 

external stability. These could arise, for example, from a future decline in foreign demand for U.S. 

debt securities triggered by market concerns about public debt dynamics, and imply sharply higher 

U.S. interest rates, with adverse global spillovers—as discussed in the 2012 Spillover Report 

(www.imf.org). 

45. The authorities agreed on the need for the U.S. to raise its saving rate, particularly 

through fiscal consolidation, but expressed concerns that global demand could falter, 

dragging down world growth. In this context, they saw decisive action to forestall the risk of a 

euro area crisis, and boost demand and increase currency flexibility in surplus countries, as essential 

to revive world growth and achieve global rebalancing, in line with goals of the G-20 Framework for 

Strong, Sustainable, and Balanced Growth. Such policy actions would improve the outlook for U.S. 

exports and the current account, facilitating the rotation from domestic demand to external 

demand. They also noted that they expect the U.S. bond market to remain deep, liquid, and 

attractive to foreign investors. 

46. While the U.S. current account deficit has narrowed after the crisis, staff noted that the 

U.S. external position remains weaker than justified by fundamentals and desired policies. The 

current account deficit is expected to widen modestly in the next few years as the output gap 

gradually closes, thus increasing imports, but lower oil prices feed through. This would lead to a 

further deterioration in the net International Investment Position (NIIP) of the United States, which 

reached -27 percent of GDP at end-2011. Model-based estimates suggest that the cyclicallyadjusted current account deficit is 1–2 percentage points of GDP weaker than the value implied by 

fundamentals and desirable policies and that the real effective exchange rate is moderately 

overvalued (0–15 percent), also in light of the recent appreciation of the dollar (Box 8). Staff argued 

that over the medium term, fiscal consolidation aiming for a primary surplus of at least 1 percent of 

GDP accompanied by some depreciation of the dollar and desired policies in partner countries 

would allow for a strengthening of the current account balance of the order of 1–2 percent of GDP 
UNITED STATES 2012 ARTICLE IV REPORT 

INTERNATIONAL MONETARY FUND 29

relative to staff’s projections. Such an outcome would be in line with maintaining external stability 

and full employment. The authorities broadly concurred with staff’s current account projections but 

did not take a view on the appropriateness of the level of the current account balance and the 

dollar. 

47. Staff also stressed the negative impact that a materialization of the fiscal cliff would 

have on other economies. Should the tail risk of the fiscal cliff materialize, the U.S. economy would 

at a minimum stall next year, with growth turning negative in early 2013. Staff analysis for the 2012 

Spillover Report (www.imf.org) suggests that the spillovers to the rest of the world would mostly 

propagate through trade channels, with negative effects felt more strongly in the immediate 

neighbors (Canada and Mexico) and a smaller but non-negligible growth impact elsewhere in 

advanced Europe and Japan, also given their narrow policy space. Spillovers to emerging markets 

would be more manageable given the lower sensitivity of their growth rates to U.S. growth, higher 

trend growth rates, and generally larger policy flexibility. That said, existing models may not fully 

capture the adverse effects of a drop in U.S. growth through lower commodity prices and exportrelated investments in emerging market economies, and sizable financial market reactions could 

imply a much more severe magnitude and propagation of the shock. While acknowledging the 

potential impact of a large fiscal adjustment on the U.S. recovery, the authorities were confident that 

a political agreement would be reached to avoid a drastic fiscal tightening in 2013. 

48. Monetary policy actions in the United States have helped sustain the U.S. recovery, 

thus supporting global growth, but also have spillovers on the rest of the world. In principle 

monetary policy easing in the United States tends to be accompanied by declines in interest rates in 

other countries, dollar depreciation, and U.S. capital outflows. However, identifying the strength of 

these effects precisely is difficult, for several reasons: policy actions are often anticipated; they occur 

in response to other shocks; and other events on domestic and international markets can coincide 

with policy announcements or actions, making it difficult to disentangle the impact of the latter. 

 Staff analysis finds mixed evidence on the impact of recent U.S. monetary policy easing actions 

on foreign interest rates and exchange rates, reflecting the fact that easing was in some 

instances undertaken in the context of a material worsening of the global outlook (which tends 

to strengthen the U.S. dollar on safe haven flows). The authorities broadly agreed with the 

findings, noting the difficulty of assessing the effects when changes in the global economic 

backdrop around announcement dates trigger effects that go in the opposite direction. 

 With regard to capital flows, staff analysis for the 2012 Spillover Report finds that U.S. investors 

have significantly reduced their purchases of foreign bonds since the onset of the financial crisis, 

despite the dramatic decline in U.S. interest rates. The destination of the flows, however, has 

changed: U.S. residents have scaled down significantly their purchases of euro area and U.K. 

bonds, and boosted purchases of bonds issued by Australia, Canada, and Latin America (in 

addition to increasing holdings of U.S. Treasuries). The authorities noted that declining interest 

rates would have contributed to higher bond outflows, ceteris paribus; however, monetary 

easing occurred in response to weak growth and an unsettled global environment, where factors 

such as high risk aversion, flight to safety, and demand for liquidity were key drivers of capital 
2012 ARTICLE IV REPORT UNITED STATES 

30 INTERNATIONAL MONETARY FUND

flows. The authorities also noted that there are fundamental reasons for capital to flow to 

emerging markets. Staff concurred, noting that the significant changes in the destination of 

flows also reflected changes in relative growth prospects and cyclical positions post-crisis. 

49. The mission welcomed the authorities’ continued commitment to trade liberalization 

and market access, in support of economic growth and expanded job opportunities. The 

authorities are aiming for progress on multiple fronts; however, as a consequence of slower 

progress in the multilateral trade framework, their short-term focus has shifted to the pluri- and 

bilateral arenas. Accordingly, the authorities are pursuing opportunities for ambitious trade 

agreements with certain APEC members in the context of the Trans-Pacific Partnership and, possibly, 

with the EU, while also defining policies for trade and investment promotion in the Arab transition 

economies. Following the recent implementation of the FTAs with Colombia and Korea, work with 

Panama on pending FTA issues is continuing. Key trade-related issues, such as industrial policies of 

trading partners, and IPR and technology protection will also be addressed under bilateral 

investment treaties (BITs), based on the newly revised model BIT. Staff welcomed the authorities’ 

efforts to resist protectionist pressures and ensure continued consistency of domestic legislation 

and practices with WTO principles and international obligations, including in reforms of agricultural 

support programs. The mission encouraged the authorities to aim for multilateral trade 

liberalization, including new approaches as necessary. 

STAFF APPRAISAL

The main policy challenge is to use effectively the limited policy space available to support the 

recovery in the near term, while restoring fiscal sustainability with a balanced approach to mediumterm consolidation and completing financial sector reforms. 

50. It is critical to remove the uncertainty created by the “fiscal cliff” in 2013 and 

promptly raise the debt ceiling, pursuing a pace of deficit reduction that does not sap the 

economic recovery. The threat of a fiscal cliff could create headwinds to economic activity already 

later this year, and should the fiscal cliff materialize, the domestic growth effects would be severe, 

with negative spillovers to the rest of the world. Policymakers should address the policy 

uncertainties as soon as possible—including through a temporary extension of current policies if a 

bipartisan agreement on tax and spending measures proves too difficult to achieve this year. A 

smaller deficit reduction than envisaged in the President budget would be appropriate in staff’s 

view, given the weak economy and downside risks, limited room for monetary policy to offset the 

fiscal drag, and the risk of hysteresis effects. Staff’s recommended pace of adjustment would be 

consistent with a federal deficit of about 61⁄4 percent of GDP for FY2013—some 3⁄4 percentage point 

of GDP higher than planned in the President’s budget proposal. This would imply a contraction of 

the general government structural primary deficit of around 1 percent of GDP in calendar year 2013. 

The composition of spending should be as growth-friendly as possible, with emphasis on highmultiplier policies such as infrastructure spending, training programs to limit skill mismatches and 

hysteresis effects, housing initiatives (measures already proposed by the Administration), and a 

further extension of emergency unemployment benefits. Meanwhile, the federal debt ceiling should
UNITED STATES 2012 ARTICLE IV REPORT 

INTERNATIONAL MONETARY FUND 31

be raised well ahead of the deadline to help reduce uncertainty and avoid the risk of losses in 

confidence and financial market instability as the cut-off date approaches. 

51. At the same time, a credible and comprehensive fiscal consolidation plan remains 

urgently needed. Policymakers should agree as early as possible on a comprehensive set of 

measures that would stabilize the public debt ratio by mid-decade, and subsequently put it firmly on 

a downward path. This would enhance the room for fiscal policy maneuver in the near term, as well 

as limit the possibility of an eventual spike in risk premia on U.S. sovereign debt, which would be 

highly damaging both for the United States and the rest of the world. To achieve this objective, 

policymakers could target a medium-term primary surplus of at least 1 percent of GDP, which would 

stabilize the debt ratio even factoring in a significant rebound of interest rates from their current low 

levels. In this context, the deep automatic spending cuts envisaged under the Budget Control Act 

(the so-called “sequester”) should be replaced with specific, back-loaded measures generating at 

least an equal amount of savings.

52. This medium-term consolidation effort will need to include revenue-raising measures 

and reforms to slow the growth of entitlement spending. With discretionary spending capped 

and defense outlays projected to fall significantly, policymakers’ attention must shift to entitlements, 

the key driver of long-term spending. Policymakers should fully implement the cost-saving 

provisions of the health care reform and additional saving measures could be phased in gradually. 

The Social Security imbalances warrant an early parametric reform. Given the size of the budget 

deficit, age-related spending pressures, and the relatively low tax ratio, the medium-term plan 

should also include higher revenues. Revenues could be raised through a menu of options, including 

lower tax expenditures (which amount to some 7 percent of GDP and disproportionately benefit 

high-income taxpayers), the introduction of a VAT and carbon taxes, and higher marginal personal 

income tax rates. There is also room for improving the structure of corporate taxation, including by 

base-broadening, lowering marginal rates, and achieving a more efficient tax treatment of 

multinational enterprises.

53. Monetary policy conditions appropriately remain very accommodative, with some 

room for further easing should the outlook deteriorate. We welcome the Federal Reserve’s 

recent decision to further extend the maturity of its securities holdings, which should put additional 

downward pressure on long-term interest rates. Yields on longer-term Treasury securities are 

extraordinarily low and the spreads between agency MBS and Treasury bond yields remain tight. We 

estimate that the innovative tools adopted by the Fed over the past year have reduced 10-year 

Treasury bond yields by some 60 basis points. Should the outlook worsen, further easing may be 

warranted. In this regard, given the relatively high share of the Fed’s holdings of Treasury securities 

at longer maturities and the importance of the housing sector for the outlook, additional net MBS 

purchases could be considered. Their effectiveness in supporting growth would be enhanced if 

policy actions and proposals to expand access to mortgage refinancing were to gain further traction. 

Should global financial turmoil intensify, the Fed would need to stand ready to intervene with 

emergency liquidity facilities to mitigate the risks of severe financial disruption. 
2012 ARTICLE IV REPORT UNITED STATES 

32 INTERNATIONAL MONETARY FUND

54. Timely and aggressive monetary policy easing by the Federal Reserve since the fall of 

2008 has been instrumental in avoiding the risk of a depression in the United States—which 

would have had severe implications for the world economy—and in appropriately sustaining the U.S. 

recovery at difficult junctures. Easy monetary policy in the United States (as in other advanced 

economies) may encourage portfolio outflows, particularly to economies with favorable growth 

prospects and open capital accounts, and this can potentially create challenges for their 

macroeconomic management. However, these effects are likely tempered in the current unsettled 

external environment, characterized by high risk aversion and safe-haven flows to the United States. 

55. The U.S. current account deficit has declined after the crisis, but the external position 

remains weaker than justified by fundamentals and desired policies. The current account deficit 

is expected to widen modestly in the next few years as domestic demand strengthens but oil prices 

decline, leading to a further deterioration in the U.S. net international investment position. Over the 

medium term, fiscal consolidation aiming for a primary surplus of at least 1 percent of GDP 

accompanied by some depreciation of the dollar and adjustment in partner countries’ policies would 

allow for a strengthening of the current account balance of some 1–2 percent of GDP, consistent 

with external stability and full employment. 

56. Staff welcomes the authorities’ recent measures to boost the housing market, 

although further action may be warranted to remove the distortions that prevent a faster 

resolution of the housing crisis. The authorities have responded to the persistent weakness in the 

housing market with a host of measures—including the expansion of the mortgage modification 

and principal reduction program and the easing of some of the frictions in the refinancing program. 

Staff supports the timely and aggressive implementation of these measures, including the 

participation of Government-Sponsored Enterprises in the principal reduction program and ensuring 

adherence by servicers to the loosened eligibility criteria under the expanded modification program. 

However, in light of the importance of the housing market in securing the economic recovery and 

the downside risks to the outlook, additional steps could be taken to strengthen the housing 

recovery. These include measures to facilitate the conversion of foreclosed properties into rental 

units and supporting access to refinancing on a larger scale, in line with the Administration’s 

proposals, which would also strengthen the positive impact of lower interest rates on aggregate 

demand. Consideration should also be given to allowing mortgages to be modified in personal 

bankruptcy courts. 

57. Policies are needed to reduce the risk that long-term unemployment could morph into 

higher structural unemployment and reduce potential output. While staff views most of the 

increase in unemployment as reflecting cyclical factors, the long-term unemployment rate is 

significantly above levels seen in previous recessions and has declined relatively little since the start 

of the recovery. Elevated long-term unemployment raises the risk of a loss of human capital and 

attachment to the labor force, and could lead to a lower participation rate. Active labor market 

policies, such as training and support for job search, have been shown to improve the employment 

prospects of the long-term unemployed and thus should be adequately funded. Temporary tax
UNITED STATES 2012 ARTICLE IV REPORT 

INTERNATIONAL MONETARY FUND 33

 incentives to expand labor demand—particularly if targeted toward the long-term unemployed—

are also desirable. 

58. Staff welcomes the progress achieved over the past year in implementing the DoddFrank Act and global financial reforms. Progress included the issuing of final rules on the 

submission of resolution plans (“living wills”) for systemically important financial institutions (SIFIs); 

the set up of the orderly liquidation authority; the definition of the criteria behind the designation of 

SIFIs for enhanced supervision and prudential standards; and the introduction of enhanced capital 

standards under rules closely aligned with Basel 2.5 as of January 2013. Also, the United States is 

among the jurisdictions that are close to implementing new rules on centralized clearing of overthe-counter derivatives, in line with G-20 commitments. 

59. But more remains to be done to increase the resilience of the U.S. financial system. 

Given the size of the industry, its prominence in short-term funding markets, and susceptibility to 

runs, strengthening the regulation of money market mutual funds remains critical, especially as the 

emergency facility used during the financial crisis to backstop the market is no longer available. 

Another important remaining task is to reduce the systemic risk deriving from the dependence of 

the tri-party repo market on intraday liquidity provided by the clearing banks. While the Volcker rule 

could in principle reduce systemic risk, its effectiveness could be hindered by an expansive 

interpretation of exemptions allowed under the law and the migration of risky activities outside of 

the regulatory perimeter. It is also important to minimize the potential adverse spillovers of the rule 

on foreign entities and markets as well as market liquidity more generally. Removing the uncertainty 

related to the implementation of the risk-retention provision of the Dodd-Frank Act may help 

encourage a gradual recovery of private securitization and ease mortgage market conditions. Also, 

there is a need to fully articulate a medium-term strategy to reduce the role of GSEs, building on the 

2011 White Paper, so as to encourage a gradual shift in the mortgage market towards private 

institutions. 

60. At the same time, adequate implementation of the new regulation requires providing 

appropriate funding to the regulatory and supervisory agencies. Some agencies continue to 

experience budgetary constraints that limit their ability to meet the deadlines associated with the 

domestic and international reforms, and may hinder their ability to effectively monitor financial 

institutions and markets once the new regulations come into force. Staff views the lifting of these 

constraints as a high priority. 

61. A multilateral approach to economic policy management remains critical for systemic 

countries such as the United States, whose policy actions have significant cross-border effects. 

In particular, the fiscal consolidation plan would be consistent with the rebalancing of global 

demand and reduction of global imbalances—together with efforts to increase domestic demand in 

surplus countries, as highlighted in the G-20 Mutual Assessment Process. At the same time, striking 

the right balance between fiscal consolidation and macroeconomic policy support would benefit the 

rest of the world, as it would avoid the risk of a spike in U.S. interest rates in the medium term and 

an abrupt decline in U.S. growth next year, at a particularly delicate juncture for the world economy. 

Given the size of cross-border financial linkages, further progress in implementing financial reforms
2012 ARTICLE IV REPORT UNITED STATES 

34 INTERNATIONAL MONETARY FUND

coordinated with other jurisdictions in order to closely align key regulations and standards would be 

globally beneficial, and reduce the scope for regulatory arbitrage. 

62. We welcome the authorities’ efforts to resist protectionist pressures, while facing a 

challenging domestic and global economic environment. We encourage them to continue to 

ensure consistency of domestic legislation and practices with WTO principles and international 

obligations, including in reforms of agricultural support programs, and to aim for multilateral trade 

liberalization, including new approaches as necessary. 

63. The next Article IV consultation is scheduled to take place on the standard 12-month cycle. 

 
UNITED STATES 2012 ARTICLE IV REPORT 

INTERNATIONAL MONETARY FUND 35

Box 1. Financial Conditions in the U.S. 

After some tightening at the end of 2011, overall financial conditions in the United States loosened in early 

2012. Staff’s Financial Condition Index—a weighted average of 

a broad series of financial indicators, with weights given by 

their contribution to the movements of a common factor (see 

Matheson, 2011, for further details)—tightened in the last 

quarter of 2011. Turmoil in global financial markets led to 

higher credit spreads, weaker asset valuations, and an 

appreciation of the dollar, more than offsetting the continued 

easing in U.S. banks lending standards as suggested by 

surveys. But early in 2012 overall financial conditions in the 

United States eased again, with lower stress in global financial 

markets leading to a tightening of spreads and higher asset 

valuations, while overall bank lending standards remained 

broadly unchanged. 

This aggregate picture masks important differences across 

sectors: 

 Credit conditions facing large corporates continue to be quite accommodative. Corporates are flush with 

cash and have easy access to bond finance, while banks have expanded their commercial and industrial loans. 

 Credit conditions for small- and medium-sized businesses are less favorable. Small businesses rely 

almost exclusively on credit from banks, and banks’ SME lending portfolio is still 15 percent below its peak in 

2008. Meanwhile, small- and medium-sized businesses have traditionally relied on personal residence as 

collateral and have faced difficulties obtaining credit as the value of home collateral remains low. Still, recent 

surveys suggest that concerns about the sales and profit outlook are driving weak demand for credit, rather 

than access to credit being a major constraint. 

 Credit conditions for households remain tight. While consumer loans—e.g., credit cards and auto loans—

are stabilizing, tight mortgage lending conditions have curtailed the amount of credit extended to borrowers. 

Notably, new borrowers’ credit scores are higher for both prime and FHA mortgages relative to the pre-crisis 

years. Additionally, the unresolved issues in the housing sector—shadow inventory, foreclosures, regulatory 

reform—continue to weigh on banks’ appetite and capacity for lending. 

Tight financial conditions for households also reflect the 

continued weakness of the “shadow” banking system. The 

“shadow” banking system—including the GSEs, other assetbacked securities providers, broker/dealers, and finance 

companies—played an important role in credit to the real 

sector before the crisis, particularly housing finance. With the 

reduction of its role after the crisis, credit creation has been 

affected, especially mortgages. Indeed, the decline in home 

mortgages—from about $11 trillion in 2007 to about 

$10 trillion in 2011—roughly mirrors the $1 trillion decline in 

the private-label MBS market, while the volume of GSE-backed 

MBS is still close to pre-crisis levels. By contrast, corporate 

bond issuance rose over the same period.

-1

0

1

2

3

4

5

6

-1

0

1

2

3

4

5

6

Jun-07 Aug-08 Dec-09 Mar-11 Jun-12

Surveys Prices

Spread FCI

U.S. Financial Conditions Index and 

Contributions by Class of Indicator

(standard deviation from average)

Source: Matheson (2011); Bloomberg, LP; and Fund staff 

estimates.

Note: Value above zero line denotes tightening of financial 

conditions; value below zero line denotes loosening of financial 

conditions.

0

2000

4000

6000

8000

10000

12000

14000

0

500

1,000

1,500

2,000

2,500

3,000

1996 1999 2002 2005 2008 2011

MBS Issuance and Mortgage Loans

Have Fallen (billions of USD)

Agency-backed MBS

(LHS)

Private-label 

MBS (LHS)

Home mortg.

loans (RHS)

Sources: SIFMA; Flow of Funds Accounts of the United 

States; and Fund staff estimates.
2012 ARTICLE IV REPORT UNITED STATES 

36 INTERNATIONAL MONETARY FUND

Box 2. The Effects of Recent U.S. Monetary Policy Actions 

The Fed responded to weaker-than-expected U.S. growth 

over the past year with a number of unconventional 

measures to ease financial conditions and support 

economic activity. The FOMC announced in August 2011 

that it anticipated exceptionally low federal funds rates at 

least through mid-2013, and later (January 2012) extended 

the period to late-2014. In September 2011, the Fed restarted 

net purchases of MBS to support the housing sector and 

launched “Operation Twist” (OT), entailing purchases of up to 

$400 billion in U.S. Treasuries with maturities above 6 years 

by June 2012, matched by sales of shorter-term securities. 

Staff estimates suggest that Operation Twist was effective in reducing long-term U.S. Treasury yields, 

but the pass-through to some riskier assets was more than offset by a deteriorating growth outlook. 

OT aimed at lowering longer-term yields by expanding the share of the outstanding long-term securities 

held by the Fed. While there is a wide range of estimates, results generally suggest that the Fed’s actions 

had a significant and persistent impact on long-term Treasury yields. 

 High frequency event studies show a fall in the ten-year Treasuries of 22 basis points in the days 

following the announcement, while the 30-year 

Treasury and agency MBS yields dropped by 30–

40 bps. However, the prices of riskier assets (e.g., stock 

markets and oil prices) declined sharply and the U.S. 

dollar appreciated. This negative reaction was likely 

due to the sizable increase in market uncertainty (as 

measured by the VIX) reflecting concerns with the 

economic outlook and other adverse news on the 

same day. 

 As a complement to the event studies, staff estimated 

the sensitivity of the 10-year Treasury yield to the Fed’s 

share of outstanding publicly-held long-term Treasury 

securities using regression analysis and controlling for underlying economic conditions. The results 

suggest a decline of 11–50 basis points in the ten-year Treasury rate on the basis of the increase in the 

Fed’s share of long-term government securities since the announcement of OT (through 2012Q1). 

Long-term Treasury and MBS yields also fell following the forward-guidance announcements. By 

providing explicit forward guidance on the path of the policy rate over a longer period, the Fed helped to 

lower rates across the yield curve. The communication strategy could be particularly effective under the zero 

lower bound on policy rates. The 10-year Treasury yields fell by a combined 34 bps in the days following the 

FOMC statements, while 30-year government securities and MBS drop 20–48 bps. The impact on other 

(riskier) assets was less noticeable, although stock markets rose and investment-grade yields fell somewhat. 

The reaction of the U.S. dollar was mixed, depreciating only following the January announcement. 

The Fed actions had some impact on mortgage rates. The immediate effect of OT announcement on 

mortgage rates was subdued (the 30-year mortgage rate fell 7 basis points); however by end-2011, 

mortgage rates had fallen by 15–20 basis points, partially reflecting the Fed’s MBS purchases. In addition, 

mortgage rates dropped 10–17 basis points following each of the forward guidance announcements; 

however, the drop was more modest than for the 30-year MBS yields, likely reflecting supply constraints and 

limited competition. 

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Jan-11 Apr-11 Jul-11 Oct-11 Jan-12

10-year Treasury yield

Pre-action

Post-action

Ten-year Treasury Bond Yield

(percent)

Source: Haver Analytics.

0

10

20

30

40

0

10

20

30

40

2006 2008 2010 2012

Operation twist announcement

0-5 years remaining maturity (percent)

10+ years remaining maturity

5+ years remaining maturity

Fed's Share of Total Government Securities

(percent) 

Source: Haver Analytics.
UNITED STATES 2012 ARTICLE IV REPORT 

INTERNATIONAL MONETARY FUND 37

Box 3. The Health of the U.S. Banking System 

Major U.S. bank holding companies (BHCs) have attempted to strengthen their balance sheets in a 

challenging operating environment. The major banks have struggled with an environment of low interest rates, 

an uncertain macroeconomic and regulatory outlook, financial volatility, and continued legal problems. On the 

whole, banks have realized profits, bolstered capital positions, and girded themselves against shocks. The benefits 

of these actions were evidenced by most systemic banking institutions performing favorably in the authorities’ 

Spring 2012 Comprehensive Capital Analysis and Review (CCAR) stress test. However, banks continue to be 

challenged by large European exposures, credit rating downgrades, an uncertain earnings outlook, and investor 

concerns escalated by a large bank’s disclosure of a major trading loss due to deficient risk-management 

practices. As a result, share prices are low and default risk measures are elevated. 

Recent earnings have been volatile and below historical averages. For the full-year 2011, all but one of the 19 

CCAR institutions posted positive pre-tax net income. However, banks’ earnings are on average lower than in the 

pre-crisis period at the top 4 BHCs, traditional banks, and other major BHCs. While many factors are contributing 

to reduced earnings, securitization revenues have been low since the onset of the crisis. Provisioning expenses 

have supported earnings; however, releases from loan loss reserves have contributed to leave system-wide reserve 

coverage low by historical standards. Trading revenues have gained in prominence at the top 4 BHCs and the 

more traditional banks, but they have helped to contribute to significant volatility in net income. 

Capitalization has improved substantially since the crisis due to a variety of actions taken by the BHCs. The 

ratio of total equity to total assets rose to 9.6 percent in the first quarter of 2012, from a low of 7.5 percent in the 

third quarter of 2008. Likewise, the tier 1 common capital ratio has improved from 5 percent at end-2008 to 

10.9 percent as of March, as the composition of capital has shifted towards loss-absorbing common capital. To 

achieve these gains, the major BHCs have undertaken a variety of measures: 

• Reduced or suspended common dividends. Over 2008–09, 16 of the 18 publicly-traded CCAR institutions cut 

common dividends in at least one quarter, in some cases in response to regulators’ orders. As banks have 

become more profitable, bolstered capital positions, and passed regulators stress tests, two-thirds of the 

Net Income at Large U.S. BHCs 1/

(as percent of total assets)

Sources: SNL Financial and Fund staff calculations.

1/ Before taxes and extraordinary items.

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2002-072008-092010-112002-072008-092010-112002-072008-092010-11

Top 4 Traditional banks Other institutions

0

2

4

6

8

0

50

100

150

200

2006 2007 2008 2009 2010 2011 2012

Other

Comm. & industrial

Comm. real estate

Consumer

Residential Coverage ratio

(reserves, pct 

of noncurrent 

loans; left)

Charge-offs (percent, a.r.; right)

Credit Quality Indicators

Capital Ratios at Large U.S. BHCs

(percent)

Sources: SNL Financial and Fund staff estimates.

0

3

6

9

12

0

3

6

9

12

2002-07

2008Q32012Q1

2002-07

End-2008

2012Q1

Total equity as pct of total 

assets

Tier 1 common capital 

ratio

0

200

400

600

800

0

200

400

600

800

Increase to Capital

Capital benefit from derisking

New common equity 

issues

Foregone common 

dividends

Capital Raising and Benefits

(billions of dollars)
2012 ARTICLE IV REPORT UNITED STATES 

38 INTERNATIONAL MONETARY FUND

Box 3. The Health of the U.S. Banking System (continued)

 publicly traded institutions increased distributions already and more increases are likely, although current 

common dividends per share remain below 2007 levels at most BHCs. 

• Shift toward common equity. New common equity offerings at the CCAR BHCs have totaled more than 

$160 billion since 2009. Most transactions occurred as the BHCs raised funds to repay preferred equity issued 

through the Troubled Asset Relief Program (TARP). New capital issuance has slowed after 2009, when the 

largest TARP repayments occurred. Transactions in 2010-11 have financed further CCAR institutions’ TARP 

redemptions and acquisitions of new lines of business. Additionally, many BHCs have redeemed trust 

preferred securities and other preferred equity ahead of the adoption of new capital rules excluding them 

from regulatory capital. In some cases, BHCs replaced these securities with common equity. 

• Reduced regulatory measures of balance-sheet risk. Since end-2009, the CCAR institutions’ total assets have 

grown about 10 percent, while risk-weighted assets have decreased 2.8 percent, as banks have recomposed 

their balance sheets in favor of safer assets. Consequently, the ratio of risk-weighted assets to total assets has 

fallen to an abnormally low level of 57 percent at the CCAR institutions. Banks have realized a major benefit 

from de-risking, since they can hold less capital against their assets to maintain a high capital ratio. According 

to staff estimates, the CCAR BHCs would need to raise about $230 billion in capital if they were to achieve 

their March tier 1 common capital ratios with a share of risk-weighted assets in total assets in line with 

historical norms. These actions have reduced the need for banks to further dilute shareholders. Of the 11 

BHCs reporting a reduced share of risk-weighted assets to total assets relative to the pre-crisis average, more 

aggressive de-risking was observed at BHCs that had more depressed share prices relative to their 2007 

levels. 

The results of the Comprehensive Capital Analysis and Review (CCAR) exercise released in March suggest 

that the largest U.S. banks would be resilient to a very severe shock. The exercise evaluated the capital 

adequacy, including capital distribution plans going forward, of the 19 U.S. largest BHCs until end-2013 under 

stressed scenarios, which included a deep recession, with rising unemployment and plummeting asset prices. The 

scenario was more severe than those in the 2011 CCAR stress test exercise. Results showed one bank failing to 

meet the required Tier 1 capital minimum of 5 percent and an additional three institutions missing the required 

thresholds on the basis of their proposed capital distribution plans. The Fed approved the capital distribution 

plans of 15 of the 19 institutions and the majority of those outlined increased dividends, share buyback programs 

or both. Overall the results were reassuring and broadly in line with expectations. 

However, market-based measures of the health of the 6 largest U.S. banks’ show continued investor 

concerns, partly reflecting heightened risk aversion worldwide. Recent share prices have remained below their 

post-Lehman highs, partly reflecting perceptions of both intensifying risks and a weakening outlook. Heightened 

concerns over banks have not been confined to the U.S., as equity prices for Asian and European banks are also 

broadly down. In line with depressed share prices, CDS spreads for the 6 largest BHCs have been ratcheting up 

recently to levels well above the lows achieved in the post-Lehman era. The rise is due in part to concerns about 

individual BHC’s funding structures, exposures to Europe, and expected rating actions, as well as worries about 

financial institutions globally—the price for credit protection on European banks’ debts has also risen. 

Five-Year Credit Default Swap Spreads

(basis points)

Sources: Markit; Bloomberg, LP; and Fund staff calculations.

Top 6 BHC's Equity Prices

(indexes, Jan 1, 2009=100)

0

250

500

750

1,000

0

250

500

750

1,000

2009 2010 2011 2012

JPM

BoA

MS

GS

WFC

Range of 11 Other

CCAR BHCs

0

50

100

150

200

250

300

350

0

50

100

150

200

250

300

350

2009 2010 2011 2012

JPM GS

MS WFC

BoA Citi
UNITED STATES 2012 ARTICLE IV REPORT 

INTERNATIONAL MONETARY FUND 39

Box 4. Meeting Environmental and Fiscal Objectives with a Carbon Tax 

The carbon tax is an effective instrument to reduce environmental risks from carbon emissions. 

Atmospheric accumulations of CO2 and other greenhouse gases could raise temperatures by up to 

6.5 degrees of Celsius over pre-industrial levels by 2100, with substantial risks to the global economy. A 

carbon tax would provide incentives to reduce emissions and invest in energy-efficient and renewable 

technologies. Several countries have implemented carbon taxes or similar fiscal instruments—for example, 

Finland, Netherlands, Norway, Sweden, and Denmark in the early 1990s, and Ireland and Australia more 

recently. The U.S. Interagency Working Group recommended a carbon tax of about $20 per metric ton of 

CO2

1

 Such a tax could be raised by about 2–5 percent annually in real terms, cutting emissions by 5–

15 percent. 

The carbon tax could raise substantial new budgetary 

revenue, about $100 billion annually, or 0.6 percent of 

GDP.2

 Imposing the tax could somewhat reduce economic 

growth in the short term, but the negative medium-term 

effects should be very modest, especially if the new 

revenues are used to reduce the national debt or partly 

lower the burden of other taxes. The potential negative 

effects would also be mitigated by granting U.S. companies 

tax credits for purchasing emission offsets abroad—this 

strategy would also be supportive of financial flows to 

developing countries. 

The carbon tax is straightforward to administer. The tax can be applied to the carbon content of fossil 

fuel products ‘upstream’ in the supply chain, as a natural extension of the existing motor fuel taxes. The tax 

administration would primarily involve approximately 150 petroleum refineries, 500 large natural gas 

operators, and about 1,500 coal mines. Motor fuels should not be exempt from the carbon tax as the current 

fuel taxes (which should continue to be levied) undercharge for the negative side effects of vehicle use such 

as road congestion and local pollution. 

The carbon tax would have distributional effects which need to be addressed through targeted 

mitigation policies. A $20 carbon charge would increase gasoline prices by about 18 cents a gallon, 

electricity prices by 1 cent per kWh, and coal prices by $40 per short ton. The carbon charges tend to be 

regressive, but low-income households could be compensated through transfer payments, earned income 

tax credits, and higher personal tax thresholds costing less than 10 percent of carbon tax revenues.3

 Energyintensive, trade-exposed firms could also be granted transitory production subsidies. 

————————————— 

1 See Interagency Working Group on Social Cost of Carbon. 2010. Social Cost of Carbon for Regulatory Impact 

Analysis under Executive Order 12866. United States Government. 

2 Source: A. Krupnick, et al., 2010. Towards a New National Energy Policy: Assessing the Options. Resources for the 

Future and National Energy Policy Institute, Washington, DC. 

3

 See T. Dinan, 2009 (Congressional Budget Office). The Distributional Consequences of a Cap-and-Trade Program 

for CO2 Emissions. Statement to the Subcommittee on Income Security and Family Support, Committee on Ways 

and Means, U.S. House of Representatives.

0

5

10

15

20

25

30

35

40

80

100

120

140

160

180

200

220

2012 2014 2016 2018 2020 2022

Projected Revenue from Carbon Tax

Carbon tax rate

($ per ton of CO2, RHS)

Carbon tax revenue

(revenue per year, $bns, LHS)

Source: Krupnick at al. (2010).
2012 ARTICLE IV REPORT UNITED STATES 

40 INTERNATIONAL MONETARY FUND

Box 5. Recent Housing Policies and Remaining Frictions 

The Administration has adopted, since 2009, a series of programs to address the foreclosure crisis. At 

the center of the Administration's response to the housing crisis is the Making Home Affordable (MHA) 

program, which was launched in March 2009, and included two key components: the Home Affordable 

Refinance Program (HARP) and the Home Affordable Modification Program (HAMP). 

The impact of the modification and refinancing programs has been so far too muted to make a dent 

in the foreclosure crisis. Both HAMP and HARP were expected to reach millions of borrowers. While 1.8 

million modifications have been initiated under HAMP as of May 2012 (since the program started in April 

2009), only one million of these were made permanent. HARP has reached only around a million borrowers, 

which is far below the potential given the large share of borrowers who are paying above-market interest 

rates in the universe of GSE-owned and guaranteed loans. 

More recently, these programs were expanded. 

In October 2011, The FHFA expanded HARP by removing restrictions on very high loan-to-value (LTV) loans, 

lowering the refinancing fees charged by the GSEs, and easing representations and warranties (the legal 

obligation for originators to repurchase badly underwritten mortgages that become delinquent). In Q1-

2012, average monthly HARP refinancing has been around 75 percent higher than its average in 2011. This 

suggests that the program has had a material impact on the ability of high LTV borrowers to refinance. 

As of June 2012 eligibility criteria for HAMP were loosened by allowing households with lower debt serviceto-income ratios to participate, and incentives for investors to carry out principal reductions under HAMPPRA were tripled. These incentives were also extended to the GSEs. The Federal Housing Finance Agency 

(FHFA) is expected to make a final decision on the GSEs’ participation in HAMP. The participation of the GSEs 

would increase the impact of the program given their market share. 

However, remaining barriers and frictions in the programs could continue to hamper their success. 

 The recent expansion of HARP has eased representations and warranties only for same-servicer 

refinancing. Refinancing with another servicer (cross-servicer refinancing) remains very challenging 

for high loan-to-value borrowers. This lack of competition has been a major contributing factor to 

the weak refinancing activity. 

 The disappointing results of the old HAMP have been due to several factors some of which remain 

unaddressed under the new version. These include, among others: (a) a misalignment of the 

incentives of investors and servicers due to the fact that modifications can be, in some cases, more 

costly to servicers than foreclosures, (b) conflicts of interest between senior and junior lien holder, a 

problem that the “Second Lien Modification Program” tries to address, and (c) legal frictions due to 

ambiguities in the Pooling and Servicing Arrangements which can limit modifications both explicitly 

and implicitly. 

The Administration has recently proposed to further expand HARP by addressing additional frictions 

and extending it to non-GSE loans. In the Administration proposals, representations and warranties on 

cross-servicer refinancing would be eased in order to encourage competition on the refinancing market. The 

proposal also aims to provide access to low-cost refinancing for non-GSE mortgages through the FHA. Three 

recently proposed bills aim at implementing these proposals, but approval by Congress is uncertain. If 

approved, the proposed changes would likely lead to a significant increase in refinancing. However, if 

rejected, the FHFA has the authority to implement the proposed changes for the GSE market. 
UNITED STATES 2012 ARTICLE IV REPORT 

INTERNATIONAL MONETARY FUND 41

Box 6. Progress in Addressing U.S. FSAP Recommendations 

Over the last year, further progress has been made in addressing the U.S. FSAP recommendations. The 

authorities have continued to advance in the implementation of the DFA, as described also in section E, 

which addresses the majority of the U.S. FSAP recommendations. 

The restructuring, albeit limited, of the regulatory architecture has been completed. The transfer of the 

responsibilities of the Office of Thrift Supervision (OTS) to the OCC, the FDIC, and the Fed has been 

completed, and the Federal Insurance Office (FIO) and the Consumer Financial Protection Bureau (CFPB) 

have become fully operational. However, challenges remain in coordinating the regulation and supervision 

of commercial banks, thrifts, securities and derivative markets. 

Regulation and supervision of the financial sector has been strengthened. The banking agencies have 

begun to conduct annual stress tests, including within the CCAR, frequently conduct assessments across the 

largest firms and meet periodically, also with foreign regulators, to discuss supervision of these firms. The 

Fed proposed a rule to implement stricter prudential regulation for the largest BHCs and for SIFIs. The CFTC 

has finalized the regulation of derivative clearing organizations (DCOs) and proposed rules with regard to 

capital and margins for un-cleared swaps, and the SEC has proposed rules to improve the risk management 

of central clearing counterparties (CCCPs). In the insurance sector, rules to strengthen the supervision of 

insurance groups, the regulation of bond insurance and securities lending, and to increase information 

sharing among state and federal authorities have been adopted. Resolution plans for large and complex 

financial groups, “living wills”, are being finalized to meet the deadlines for submission to regulators which 

span over the period between July 1, 2012 and end 2013 according to the size of the group. 
2012 ARTICLE IV REPORT UNITED STATES 

42 INTERNATIONAL MONETARY FUND

Box 7. Recent Proposals on GSEs Reforms 

In February 2011, the Administration issued a report to Congress containing three alternative options 

for winding down the GSEs and reducing the government’s role in housing finance: 

 The first option is a completely privatized system of housing finance, with government insurance 

limited to low-income and other special borrowers, such as veterans. 

 The second offers a plan similar to the one above, but would develop "a backstop mechanism" to 

ensure that new homeowners retain access to credit during a crisis. 

 In the third option, the government would continue to leave the mortgage market to private 

players, but would offer reinsurance for the securities backed by a targeted range of mortgages. 

In February 2012, the FHFA set out a strategic plan outlining the next phase of the conservatorships 

of the GSEs, outlining three key strategic goals: 

 Building a new infrastructure that would allow private investors to replace the GSEs in the 

secondary mortgage market including by helping to create a single securitization platform, a 

standardized pooling and servicing agreement, and databases that would increase transparency for 

borrowers and investors; 

 Contracting the GSEs’ footprint and transferring credit risk to private investors through increased 

guarantee fees, loss-sharing arrangements, and greater reliance on mortgage insurance; 

 Maintaining foreclosure prevention efforts through loan modifications, increased focus on shortsales and other foreclosure alternatives, and the implementation of real estate owned (REO) initiative. 

Staff will examine reform plans in future consultations. 

 
UNITED STATES 2012 ARTICLE IV REPORT 

INTERNATIONAL MONETARY FUND 43

Box 8. The U.S. External Sector: Trends and Model-Based Assessments 

After staging a strong rebound in late 2010 and early 2011, 

capital flows to and from the United States have slowed 

significantly with the intensification of global financial 

turmoil. During the period 2011Q2–2012Q1 net purchases of 

U.S. assets by foreign residents were around 3 percent of GDP, 

entirely accounted for by foreign purchases of Treasury 

securities. During the same period net purchases of foreign 

assets by U.S. residents were virtually zero, with significant FDI 

and very modest portfolio outflows offset by a $600bn reduction 

in external bank claims (primarily on the euro area, the United 

Kingdom, and the Caribbean). 

The U.S. NIIP worsened by $1.5 trillion in 2011, reflecting 

the current account deficit as well as unfavorable valuation 

effects primarily due to the decline in foreign equity prices 

(reducing U.S. assets by some $570 billion) and the increase in 

the value of U.S. bonds due to lower U.S. interest rates (which 

increased U.S. liabilities by some $250 billion). As of end-2011 

the NIIP stood at -27 percent of GDP, a relatively modest level 

if compared to cumulative net financial flows to the U.S., which 

are around 50 percent of GDP, also thanks to largely favorable 

net valuation effects over that period. Based on staff 

projections for current account balances and growth over the 

next five years, the U.S. NIIP would gradually deteriorate to -35 

percent of GDP by 2017. 

U.S. external assets and liabilities have a different 

instrument and currency composition. U.S. external assets 

are predominantly denominated in foreign currency, with FDI 

and portfolio equity together accounting for over 50 percent of 

total assets excluding financial derivatives. Hence the value of 

U.S. external assets (and the U.S. NIIP) tends to decline in 

periods of stress on global stock markets and an appreciating 

dollar. In contrast, the lion share of U.S. external liabilities are 

dollar-denominated and consist of debt instruments, 

consistent with the central role of U.S. government debt 

securities as reserve assets. U.S. portfolio debt liabilities 

account for about 45 percent of total U.S. liabilities and about 

60 percent of U.S. GDP. 

The U.S. dollar has appreciated in recent months (some 

7 percent since its trough in July 2011) but remains some 

10 percent below its long-run average. An alternative measure of international relative prices constructed 

by the Federal Reserve Board (measuring the level of U.S. prices relative to those prevailing in its trading 

partners) is instead closer to its long-run average, reflecting on the one hand the depreciated level of the 

dollar, and on the other hand the shift in U.S. trading partners over time towards countries with lower price 

levels than advanced economies. 

U.S. Capital Flows, 2011Q2 - 2012Q1

(billions of U.S. dollars)

-600 -400 -200 0 200 400 600

Other

Banks

Portfolio

FDI

Sources: Bureau of Economic Analysis and Fund staff estimates.

Outflows

-600 -400 -200 0 200 400 600

Other

Banks

Other portfolio

U.S. Treasuries

FDI Inflows

-60

-45

-30

-15

0

15

-60

-45

-30

-15

0

15

1989 1992 1995 1998 2001 2004 2007 2010

U.S. International Investment Position and 

Cumulative Financial Flows (percent of GDP)

Cumulative financial flows,

2000-2011

International

investment 

position

Cumulative financial flows 

adjusted for valuation, 

2000-2011

Sources: Bureau of Economic Analysis and Fund staff estimates.

0 50 100 150

Assets

Liabilities

FDI (book value) Portfolio equity

Portfolio debt Other investment

Reserves

U.S. External Assets and Liabilities

(excluding derivatives, in percent of GDP)

Sources: Bureau of Economic Analysis and Fund staff estimates.
2012 ARTICLE IV REPORT UNITED STATES 

44 INTERNATIONAL MONETARY FUND

Box 8. The U.S. External Sector: Trends and Model-Based Assessments (continued)

Model-based current account and exchange rate assessments 

Model-based estimates suggest that the current account deficit is above its medium-term norm and 

that the real exchange rate is moderately overvalued. Specifically, staff’s analysis finds that a structural 

current account deficit of 11⁄2–21⁄2 percent of GDP over the medium term (implying a current account 

adjustment of 1–2 percent of GDP relative to the staff baseline) and real exchange rate depreciation of about 

0‒15 percent would be consistent with fundamentals and desirable policy settings. 

 Under the new External Balance Approach (EBA), estimates of “policy gaps” (measuring deviations of 

domestic and partner-country policies, such as the relative fiscal stance or reserve accumulation, from 

“desirable” levels) imply a current account gap for the United States of around 2 percent of GDP.1 

Similarly, CGER current account methodologies (such as the MB and ES approaches) find current 

account gaps of around 1-2 percent of GDP. 

 Estimates based on real exchange rate models in both EBA and CGER tend to find little sign of 

overvaluation (0 to 5 percent), with the worsening in fundamentals, such as the terms of trade and the 

NIIP, broadly offset by the weakness of the dollar relative to its historical average (see above). Measures 

of relative international price levels, such as the WARP—which find U.S. prices relative to those in 

trading partners closer to their long-run average—could be consistent with somewhat higher 

overvaluation, given the weak fundamentals. The estimates for real exchange rate misalignment from 

the current-account based methodologies mentioned above are in the 5–15 percent range, implying an 

overall model-based range of about 0–15 percent. 

1 See the 2012 Pilot External Sector Report (www.imf.org) for a discussion of EBA methodologies.
 UNITED STATES 2012 ARTICLE IV REPORT

INTERNATIONAL MONETARY FUND 45

2010 2011 2012 2013 2014 2015 2016 2017

National production and income

Real GDP 3.0 1.7 2.0 2.3 2.8 3.3 3.4 3.3

Net exports 2/ -0.5 0.0 -0.1 -0.2 -0.2 -0.3 -0.3 -0.3

Total domestic demand 3.4 1.6 2.0 2.3 2.9 3.5 3.6 3.5

Final domestic demand 1.8 1.8 1.9 2.3 2.9 3.4 3.6 3.5

Private final consumption 2.0 2.2 2.2 2.3 2.4 2.5 2.8 3.2

Public consumption expenditure 0.9 -1.2 -2.1 -2.0 -0.4 1.4 1.6 0.0

Gross fixed domestic investment 2.0 3.7 4.8 6.8 8.2 9.1 8.5 7.3

Private fixed investment 2.6 6.8 6.6 8.3 10.3 11.0 9.8 8.4

Equipment and software 14.6 10.4 6.7 7.0 8.0 7.7 7.6 7.6

Nonresidential structures -15.8 4.6 3.3 7.8 8.4 9.0 9.4 10.7

Residential structures -4.3 -1.3 10.4 12.8 18.8 21.1 15.1 8.2

Public fixed investment -0.3 -6.7 -2.0 0.8 -0.6 0.4 1.4 0.8

Change in private inventories 2/ 1.6 -0.2 0.2 0.1 0.0 0.0 0.0 0.0

Nominal GDP 4.2 3.9 3.9 3.7 4.3 5.0 5.3 5.5

Personal saving rate (percent of disposable income) 5.3 4.7 3.8 3.8 3.6 3.9 4.2 4.2

Private investment rate (percent of GDP) 12.4 12.7 13.3 14.0 14.8 15.8 16.6 17.2

Employment and inflation

Unemployment rate 9.6 9.0 8.2 7.9 7.5 6.9 6.3 5.9

Output gap (percent of potential GDP) -4.3 -4.3 -4.1 -3.9 -3.2 -2.2 -1.2 -0.3

Potential GDP 1.2 1.7 1.9 2.0 2.1 2.3 2.3 2.4

CPI inflation 1.6 3.1 2.2 1.7 1.8 1.9 2.1 2.2

GDP deflator 1.1 2.1 1.8 1.4 1.4 1.6 1.9 2.1

Government finances

Federal government (budget, fiscal years)

Federal balance (percent of GDP) -9.7 -9.0 -7.5 -6.0 -4.5 -3.3 -3.3 -3.2

Debt held by the public (percent of GDP) 62.8 67.7 73.0 77.1 79.1 79.3 79.1 78.7

General government (GFSM 2001, calendar years)

Net lending (percent of GDP) -10.5 -9.6 -8.2 -6.8 -5.2 -4.3 -4.3 -4.3

Primary structural balance (percent of potential nominal 

GDP) -6.2 -5.4 -4.3 -3.0 -1.7 -1.1 -1.3 -1.3

Gross debt (percent of GDP) 98.4 102.8 106.7 110.7 112.7 113.0 113.0 112.8

Interest rates (percent)

Three-month Treasury bill rate 0.1 0.1 0.1 0.1 0.1 0.7 1.8 3.4

Ten-year government bond rate 3.2 2.8 2.1 2.8 3.6 4.5 5.1 5.6

Balance of payments

Current account balance (billions of dollars) -442 -466 -491 -479 -512 -559 -616 -690

Merchandise trade balance (billions of dollars) -645 -738 -769 -817 -882 -952 -1,022 -1,118

Balance on invisibles (billions of dollars) 203 272 278 338 370 393 406 428

Current account balance (percent of GDP) -3.0 -3.1 -3.1 -2.9 -3.0 -3.1 -3.3 -3.5

Merchandise trade balance (percent of GDP) -4.4 -4.9 -4.9 -5.0 -5.2 -5.3 -5.4 -5.7

Balance on invisibles (percent of GDP) 1.4 1.8 1.8 2.1 2.2 2.2 2.2 2.2

Export volume 3/ 14.4 7.4 4.1 4.1 4.8 5.2 5.4 5.5

Import volume 3/ 14.8 5.7 3.7 4.8 5.5 5.8 6.0 6.3

Net international investment position (percent of GDP) -17.0 -26.7 -28.5 -30.0 -31.3 -32.5 -33.7 -35.0

Table 1. United States: Selected Economic Indicators 1/

(percentage change from previous period, unless otherwise indicated)

Projections

Sources: Haver Analytics and Fund staff estimates.

1/ Components may not sum to totals due to rounding.

2/ Contribution to real GDP growth, percentage points.

3/ NIPA basis, goods.
2012 ARTICLE IV REPORT UNITED STATES 

46 INTERNATIONAL MONETARY FUND

2010 2011 2012 2013 2014 2015 2016 2017

Saving and investment (percent of GDP)

Gross national saving 12.5 12.9 13.3 14.1 14.8 15.6 16.1 16.5

General government -6.6 -6.0 -4.6 -3.3 -1.7 -1.0 -0.9 -1.0

Private 19.2 18.9 17.9 17.4 16.5 16.6 17.0 17.5

Personal 4.1 3.6 2.9 2.9 2.8 3.0 3.2 3.2

Business 15.1 15.3 15.1 14.6 13.8 13.6 13.9 14.3

Gross domestic investment 15.8 15.9 16.4 17.1 17.8 18.7 19.4 20.0

Private 12.4 12.7 13.3 14.0 14.8 15.8 16.6 17.2

Fixed investment 11.9 12.4 12.9 13.5 14.4 15.3 16.1 16.7

Inventories 0.5 0.3 0.5 0.5 0.5 0.5 0.5 0.5

Public 3.5 3.2 3.1 3.1 3.0 2.9 2.8 2.8

Table 1. United States: Selected Economic Indicators (Cont.'d) 1/

(percentage change from previous period, unless otherwise indicated)

Projections

Sources: Haver Analytics and Fund staff estimates.

1/ Components may not sum to totals due to rounding.
 UNITED STATES 2012 ARTICLE IV REPORT

INTERNATIONAL MONETARY FUND 47

2009 2010 2011 2012 2013 2014 2015 2016 2017

Current account -382 -442 -466 -491 -479 -512 -559 -616 -690

Percent of GDP -2.7 -3.0 -3.1 -3.1 -2.9 -3.0 -3.1 -3.3 -3.5

Goods and services -379 -495 -560 -587 -609 -652 -704 -757 -839

Merchandise trade -506 -645 -738 -769 -817 -882 -952 -1,022 -1,118

Exports 1,070 1,289 1,497 1,563 1,621 1,713 1,828 1,964 2,108

Imports -1,575 -1,934 -2,236 -2,332 -2,438 -2,595 -2,780 -2,986 -3,227

Services 127 150 179 182 208 230 249 265 279

Receipts 509 554 606 629 665 707 753 804 858

Payments -383 -403 -427 -447 -457 -477 -505 -539 -579

Income 120 184 227 229 260 272 276 276 288

Receipts 602 676 745 666 576 561 659 909 1,381

Payments -482 -492 -518 -437 -317 -289 -383 -633 -1,093

Unilateral transfers, net -122 -131 -133 -133 -129 -133 -131 -134 -139

Capital account transactions, 

net 0 0 -1 -1 -1 -1 -1 -1 -1

Financial account 246 254 394 493 480 514 560 617 692

Private capital -688 -109 359 257 236 259 293 335 395

Direct investment -145 -115 -178 -177 -176 -185 -192 -201 -210

Outflows -304 -351 ... ... ... ... ... ... ...

Inflows 159 236 ... ... ... ... ... ... ...

Securities -123 269 50 377 400 408 426 449 472

Other investment -420 -263 488 57 12 36 59 87 133

U.S. official reserves -52 -2 -16 0 0 0 0 0 0

Foreign official assets 480 350 165 235 244 254 267 281 297

Other items 1/ 608 31 -92 0 0 0 0 0 0

Statistical discrepancy 131 217 80 0 0 0 0 0 0

Memo item: Current account 

excluding petroleum -163 -159 -118 -141 -135 -166 -204 -253 -315

Sources: Haver Analytics; and Fund staff estimates.

1/ Includes net financial derivatives.

Table 2. United States: Balance of Payments

(billions of U.S. dollars, unless otherwise indicated)

Projections
2012 ARTICLE IV REPORT UNITED STATES 

48 INTERNATIONAL MONETARY FUND

 

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Federal Government

Revenue 15.1 15.4 15.8 17.1 18.0 19.0 19.4 19.2 19.2 19.2 19.3 19.4 19.4

Expenditure 24.7 24.4 23.3 23.1 22.5 22.4 22.6 22.4 22.4 23.0 23.4 23.7 24.2

Noninterest 2/ 23.4 22.8 21.8 21.6 21.0 20.6 20.6 20.1 19.8 20.0 20.0 20.1 20.4

Interest 1.4 1.5 1.4 1.5 1.5 1.7 2.0 2.3 2.6 3.0 3.3 3.6 3.8

Balance 2/ -9.7 -9.0 -7.5 -6.0 -4.5 -3.3 -3.3 -3.2 -3.2 -3.8 -4.1 -4.4 -4.8

Primary balance 3/ -8.3 -7.4 -6.0 -4.5 -2.9 -1.6 -1.3 -0.9 -0.6 -0.8 -0.8 -0.8 -1.0

Primary structural balance 4/ -6.6 -5.9 -4.8 -3.4 -2.0 -0.9 -0.9 -0.8 -0.6 -0.8 -0.8 -0.8 -1.0

Debt held by the public 62.8 67.7 73.0 77.1 79.1 79.3 79.1 78.7 78.8 79.7 80.9 82.3 84.0

Net debt held by the public 55.7 62.0 66.5 69.9 71.3 71.4 71.3 70.9 70.9 71.9 73.2 74.7 76.6

General Government

Revenue 31.7 31.8 32.2 33.5 34.4 35.2 35.4 35.2 35.2 35.2 35.1 35.1 ...

Total expenditure 2/ 42.1 41.4 40.4 40.3 39.6 39.5 39.7 39.4 39.7 40.1 40.4 40.7 ...

Net lending 2/ -10.5 -9.6 -8.2 -6.8 -5.2 -4.3 -4.3 -4.3 -4.5 -4.9 -5.2 -5.6 ...

Primary balance 3/ -8.5 -7.4 -6.1 -4.7 -3.0 -2.0 -1.8 -1.5 -1.3 -1.5 -1.5 -1.5 ...

Primary structural balance 4/ -6.2 -5.4 -4.3 -3.0 -1.7 -1.1 -1.3 -1.3 -1.3 -1.5 -1.5 -1.5 ...

Gross debt 98.4 102.8 106.7 110.7 112.7 113.0 113.0 112.8 113.6 114.9 116.5 118.3 ...

Net debt 73.1 80.2 83.3 86.7 88.2 88.4 88.4 88.3 89.0 90.5 92.2 94.1 ...

1/ Data for 2011 general government revenue, expenditure, and net lending are IMF staff estimates.

3/ Excludes net interest.

4/ Excludes net interest, effects of economic cycle, and costs of financial sector support. In percent of potential GDP.

Projections

(budget basis; fiscal years)

Table 3. United States: Federal and General Government Finances 1/

(percent of GDP)

(GFSM 2001 basis; calendar years)

Sources: Office of Management and Budget; Haver Analytics; and Fund staff estimates.

2/ Includes staff's adjustments for one-off items, including the costs of financial sector support.

2006 2007 2008 2009 2010 2011

Revenue 33.8 33.9 32.5 30.9 31.7 31.8

Taxes 21.2 21.3 19.6 17.6 18.4 ...

Social contributions 6.9 6.9 6.9 7.0 6.8 ...

Grants 0.0 0.0 0.0 0.0 0.0 ...

Other revenue 5.7 5.8 5.9 6.4 6.5 ...

Expenditure 3/ 35.9 36.7 39.2 44.0 42.1 41.4

Expense 34.8 35.5 38.1 42.9 41.1 40.4

Compensation of employees 9.9 10.0 10.3 11.0 10.8 ...

Use of goods and services 7.9 8.0 8.6 8.8 9.0 ...

Consumption of fixed capital 1.2 1.3 1.4 1.5 1.5 ...

Interest 2.8 3.0 2.8 2.6 2.8 ...

Subsidies 0.5 0.4 0.4 0.4 0.4 ...

Grants 0.3 0.3 0.3 0.3 0.4 ...

Social benefits 11.9 12.1 13.0 15.2 15.6 ...

Of which: social security benefits 7.6 7.7 8.2 9.6 9.7 ...

Expense not elsewhere classified 2.3 2.5 3.4 5.2 3.0 ...

Net acquisition of nonfinancial assets 1.0 1.1 1.0 1.1 1.0 1.0

Gross/net operating balance 2/ -1.0 -1.6 -5.6 -11.9 -9.5 -8.6

Net lending/borrowing 3/ -2.0 -2.7 -6.7 -13.0 -10.5 -9.6

1/ Data for 2011 are IMF staff estimates.

2/ Revenue minus expense.

3/ Includes staff's adjustments for one-off items, including the costs of financial sector support.

Table 4a. General Government Statement of Operations 1/

(GFSM 2001 basis, calendar years; in percent of GDP)

Source: Government Finance Statistics.
 UNITED STATES 2012 ARTICLE IV REPORT

INTERNATIONAL MONETARY FUND 49

2006 2007 2008 2009 2010 2011

Net financial worth -48.6 -48.2 -53.8 -65.9 -73.1 -80.2

Total financial assets 18.0 19.0 22.4 24.0 25.4 22.6

Currency and deposits 2.3 2.6 4.9 4.0 4.9 3.2

Debt securities 6.5 6.6 6.3 7.1 6.8 5.5

Loans 3.1 3.1 3.2 4.5 5.2 5.8

Equity and investment fund shares 1.5 1.6 2.7 2.2 1.9 1.8

U.S. official reserve assets 0.3 0.3 0.3 0.7 0.7 0.7

Other financial asssets 4.4 4.8 5.0 5.6 5.9 5.6

Total financial liabilities 66.6 67.2 76.1 89.9 98.4 102.8

Currency and deposits 0.2 0.2 0.2 0.2 0.2 0.2

Debt securities 53.0 53.1 61.3 73.9 82.1 86.1

Loans 0.0 0.0 0.0 0.0 0.0 0.0

Accounts payable 5.4 5.6 6.0 6.0 6.1 6.3

Insurance reserves 0.3 0.3 0.3 0.3 0.3 0.3

Other financial liabilities 7.6 7.8 8.3 9.1 9.3 9.5

SDR allocations and certificates 0.1 0.1 0.1 0.4 0.4 0.4

Table 4b. General Government Financial Assets and Liabilities

(in percent of GDP)

Sources: Board of Governors of the Federal Reserve System; Bureau of Economic Analysis; and Haver 

Analytics.
2012 ARTICLE IV REPORT UNITED STATES 

50 INTERNATIONAL MONETARY FUND

 

 

 

2005 2006 2007 2008 2009 2010 2011

External indicators

Exports of goods and services 1/ 10.7 13.4 13.3 11.4 -14.3 16.7 14.2

Imports of goods and services 1/ 12.9 10.9 6.2 8.1 -22.9 19.4 13.9

Terms of trade 1/ -4.0 -1.2 0.6 -4.9 7.8 -1.9 -2.6

Current account balance -5.9 -6.0 -5.1 -4.7 -2.7 -3.2 -3.1

Capital and financial account balance 5.5 6.0 4.4 5.2 2.1 1.8 2.7

Of which:

Net portfolio investment 4.6 4.7 5.5 5.6 0.0 3.7 1.0

Net foreign direct investment 0.6 0.0 -1.4 -0.1 -1.0 -0.8 -1.2

Net other investment 4/ 0.3 1.1 0.3 -0.1 2.8 -1.3 2.9

Official reserves 2/ 65.1 65.9 70.6 77.6 130.8 132.4 148.0

in months of imports 0.4 0.4 0.4 0.4 0.8 0.7 0.7

Central bank foreign liabilities 2/ 0.1 0.1 0.1 1.4 2.4 3.4 0.2

Net international investment position 5/ -15.3 -16.4 -12.8 -22.8 -16.7 -17.0 -26.7

Of which: General government debt 6/ 18.8 20.4 22.7 28.8 31.4 35.1 37.7

External debt-to-exports ratio 1.5 1.5 1.1 1.8 1.5 1.3 1.9

External interest payments to imports 3/ 7/ 25.8 32.5 35.7 28.3 23.0 18.1 16.4

Nominal effective exchange rate 1/ -5.0 -2.5 -1.7 -4.9 -3.9 5.5 -3.3

Real effective exchange rate 1/ -4.7 -1.4 -0.6 -4.7 -3.9 4.5 -3.9

Financial market indicators

General government gross debt 67.9 66.6 67.2 76.1 89.9 98.4 102.8

Average maturity of privately-held federal debt (months) 57 58 57 46 52 57 59

Federal privately-held debt maturing within one year 9.3 8.5 9.2 16.8 17.3 17.5 17.5

Three-month treasury bill yield 3/ 3.2 4.8 4.5 1.4 0.2 0.1 0.1

Real three-month treasury bill yield 3/ -1.2 -0.1 1.6 1.6 -2.3 0.5 -1.5

Equity market index (S&P 500) 1/ 6.8 8.6 12.7 -17.3 -22.5 20.3 11.4

Banking risk indicators 8/

Total assets 2/ 10,879 11,862 13,034 13,841 13,087 13,319 13,883

Total loans and leases to assets 61.8 61.0 60.7 56.9 55.6 55.4 53.8

Total loans to deposits 94.1 92.4 94.0 87.1 78.9 78.3 73.3

Problem loans to total loans and leases 9/ 0.7 0.8 1.4 3.0 5.4 4.9 4.1

Nonperforming assets to assets 10/ 0.5 0.5 0.9 1.8 3.4 3.1 2.5

Loss allowance to:

Total loans and leases 1.2 1.1 1.3 2.2 3.1 3.1 2.6

Noncurrent loans and leases 154.7 134.8 91.7 74.4 57.7 64.5 62.5

Return on equity 11/ 17.8 17.2 11.2 -1.6 -0.5 8.1 10.8

Return on assets 11/ 1.8 1.8 1.2 -0.1 -0.1 0.9 1.2

Total capital to risk-weighted assets 12.9 13.0 12.8 12.8 14.3 15.3 15.3

Core capital ratio 8.2 8.2 8.0 7.5 8.6 8.9 9.1

1/ Percent change. 2/ Billions of U.S. dollars. 3/ Percent. 4/ Includes net financial derivatives. 5/ With FDI at 

market value. 6/ Excludes foreign private holdings of U.S. government securities other than treasuries. 7/ External 

interest payments: income payments on foreign-owned assets (other private assets plus U.S. government 

payments). 8/ All FDIC-insured institutions. 9/ Noncurrent loans and leases. 10/ FDIC-insured commercial banks 

only. 11/ Before extraordinary items and taxes.

Table 5. United States: Indicators of External and Financial Vulnerability

Sources: IMF, International Financial Statistics; Federal Deposit Insurance Corporation; and Haver Analytics.

(in percent of GDP, unless otherwise indicated)

(in percent of GDP, unless otherwise indicated)

(in percent, unless otherwise indicated)
 UNITED STATES 2012 ARTICLE IV REPORT

INTERNATIONAL MONETARY FUND 51

Figure 1. House Prices and Mortgage Market Developments

Sources: Mortgage Banker Association; Haver Analytics; and Fund staff estimates.

0

1

2

3

4

5

6

0

1

2

3

4

5

6

2005 2006 2007 2008 2009 2010 2011 2012

Mortgage foreclosure 

inventory

Mortgage foreclosures 

started

Mortgage payments 

past due 90+ days

Mortgage Foreclosures

(percent of total mortgages)

House prices have shown some firming recently, with a 

surprising increase in Q1 2012 ....

Therefore house price expectations remain subdued.

... although they still remain at depressed levels.

Risks remain, due to a large foreclosure inventory ... ... and a large shadow inventory ....

... despite foreclosure prevention efforts.

120

140

160

180

200

220

120

140

160

180

200

220

2005 2007 2009 2011 2013 2015

Actual

March 2011

June 2011

December 2011

March 2012

Case-Shiller National House Price Index

(2000Q1 = 100)

Survey date:

-20

-15

-10

-5

0

5

10

15

20

25

30

-20

-15

-10

-5

0

5

10

15

20

25

30

2005 2006 2007 2008 2009 2010 2011 2012

Selected National House Price Indices

(percent change, yoy)

FHFA

S&P Case Shiller CoreLogic

CoreLogic

(excluding distressed sales)

80

100

120

140

160

180

200

220

80

100

120

140

160

180

200

220

1981 1986 1991 1996 2001 2006 2011

Price to Rent vs. Equilibrium Level

(an undervaluation of around 6 percent in 2011)

Price to rent

(CoreLogic)

Equilibrium

18%

8%

20%

12%

10%

32%

Underwater 60-89 days past due 90 days past due

Foreclosure REO Re-performing

Shadow Inventory

(percent of 3.7m 

total inventory)

0

500

1000

1500

2000

2500

3000

3500

0

500

1000

1500

2000

2500

3000

3500

GSEs 

Permanent

HAMP 

Permanent

FHA loss 

intervention

HOPE NOW

Modifications since April 2009

(thousands)
2012 ARTICLE IV REPORT UNITED STATES 

52 INTERNATIONAL MONETARY FUND

Figure 2. Housing Market Developments

Sources: Mortgage Banker Association; Haver Analytics; Zillow; and Fund staff estimates.

On the activity side, housing starts have picked up since ... partly due to the current excess in vacancies .

the second quarter of 2011 but remain depressed ...

The improvement in starts is mainly driven by the 

multifamily sector, due to low vacancy in that sector.

Sales have also been depressed, despite some recent 

improvement. 

0

500

1,000

1,500

2,000

2,500

3,000

0

500

1,000

1,500

2,000

2,500

3,000

1/1/2000 5/1/2003 9/1/2006 1/1/2010

Housing Starts

(saar, thousands of units)

Total multifamily

Total housing starts

1-unit housing starts

8.5

9.0

9.5

10.0

10.5

11.0

11.5

12.0

250

252

254

256

258

260

262

264

2008 2009 2010 2011 2012

Rent Index and Total Vacancy Rate

(saar, thousands of units)

Vacancy rate

(percent, RHS)

Average vacancy rate

(2002 - 2007, percent, RHS)

Rent index

(Dec 1982 = 100; 

LHS)

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1/1/2000 5/1/2003 9/1/2006 1/1/2010

Home Sales

(saar, thousands of units)

New home sales 

(RHS)

Existing home sales

(LHS)

0

2

4

6

8

10

12

14

16

18

20

22

0

2

4

6

8

10

12

14

16

18

20

22

1990 1993 1996 1999 2002 2005 2008 2011

Vacant stock

Vacant stock - Equilibrium 

Estimated Excess Vacancy

(millions of units)

40

70

100

130

160

40

70

100

130

160

0 2 4 6 8 10 12 14 16

Quarters from peak

Real Residential Investment

(indexes, peaks = 100)

Interquartile range

of previous recessions

Current

episode

Median, previous

recessions

-4

-2

0

2

4

-4

-2

0

2

4

0 2 4 6 8 10 12 14 16

Quarters from peak

Interquartile range

of previous recessions

Current

episode

Median, previous

recessions

Residential Investment Contribution to Real 

GDP growth (percentage points)

The persistent weakness of residential investment stands out 

from previous recessions...

... but we are starting to see a positive contribution to 

growth, which is long overdue.
 UNITED STATES 2012 ARTICLE IV REPORT

INTERNATIONAL MONETARY FUND 53

75

100

125

150

75

100

125

150

1990 1993 1996 1999 2002 2005 2008 2011

Broad real dollar index

International relative prices (WARP)

Real Effective Exchange Rates

(indexes, Jan 1990 = 100)

Figure 3. The Dollar, Financial Flows, and Trade

Sources: Board of Governors of the Federal Reserve System; United States Department of the Treasury; Bureau of Economic 

Analysis; and Fund staff estimates.

-200

-100

0

100

200

-200

-100

0

100

200

2007 2008 2009 2010 2011 2012

Agencies and GSEs

Treasuries

Equities

Corporate bonds

TIC Flows

(billions of dollars)

-500

-250

0

250

500

-500

-250

0

250

500

2005 2006 2007 2008 2009 2010 2011 2012

Private non-bank flows

U.S. official flows

Foreign official flows

Private banking flows

Net Financial Flows 

(billions of dollars)

-9

-6

-3

0

3

-9

-6

-3

0

3

2007 2008 2009 2010 2011 2012

Net current transfers

Income balance

Trade balance

Current acct. balance

U.S. Current Account Balance

(percent of GDP)

-6

-3

0

3

6

9

-6

-3

0

3

6

9

2007 2008 2009 2010 2011 2012

Imports

Exports

Net Exports

Imports' and Exports' Contributions to Real GDP 

Growth (percentage points, s.a.a.r.)

The dollar has been appreciating recently in real terms on 

safe-haven flows sparked by renewed concerns over the euro...

...while private foreign portfolio investment remains 

mostly concentrated in Treasury securities.

The U.S. current account deficit has widened slightly

from its crisis lows on a deteriorating trade balance...

... attributable in part to a slight rebound in import

volumes and lower export volumes...

-60

-45

-30

-15

0

15

-60

-45

-30

-15

0

15

1990 1993 1996 1999 2002 2005 2008 2011

U.S. International Investment Position and 

Cumulative Current Account Balances (pct of GDP)

Cumulative net financial 

flows, 2000-2011

International

investment 

position, 

1990-2011

... but the U.S. IIP has remained much stronger than 

suggested by cumulative current account deficits.

Flows are still influenced by foreign government FX 

intervention and banking flows.
2012 ARTICLE IV REPORT UNITED STATES 

54 INTERNATIONAL MONETARY FUND

Figure 4. Labor Market Developments

Sources: Bureau of Labor Statistics; The Conference Board; Bloomberg, L.P.; Haver Analytics; and Fund staff estimates.

200

350

500

650

800

3.00

3.75

4.50

5.25

2006 2007 2008 2009 2010 2011 2012

Hires (millions, 3-month moving avg; left)

Separations

(millions, 3-month 

moving avg; left)

Initial claims

(thous.; right)

Job Creation and Destruction

-1000

-500

0

500

1000

-1000

-500

0

500

1000

2005 2006 2007 2008 2009 2010 2011 2012

Government

Private

Change in nonfarm 

payrolls (thousands)

Major Labor Indicators

50

55

60

65

70

50

55

60

65

70

1948 1958 1968 1978 1988 1998 2008

Employment/

population

Labor force 

participation rate

Employment and Labor Force Participation 

(percent)

After strengthening in late 2011, payroll gains have 

decelerated strongly since early 2012 ...

0

25

50

75

100

125

0

25

50

75

100

125

1948 1958 1968 1978 1988 1998 2008

Less than 

5 weeks

5-14 

weeks

15-26 weeks

Duration of Unemployment

(percent of unemployed persons)

27+

weeks

88

94

100

106

112

88

94

100

106

112

2005 2007 2009 2011

Labor Input and Productivity

(indexes, 2009:Q2 = 100)

Labor productivity

(output per hour)

Average weekly hours

Employment

Level at

business

cycle peak

...as hires have decelerated.

Labor market slack and unemployment have decreased 

since 2011Q4 but remain elevated...

... due, to a large extent, to a continued drop in participation 

while employment remains historically low.

With hours recovering and productivity slowing, growth 

may become more jobs intensive. Long-term unemployment continues to be a major 

concern.

4

5

6

7

8

9

10

11

12

4

6

8

10

12

14

16

18

20

2005 2006 2007 2008 2009 2010 2011 2012

Unemployed

Unemployed

(RHS;

pct of labor force)

Broad Labor underutilization

(LHS; pct of labor force +

marginally attached

workers)

Unemployed and Broad Labor Underutilization
 UNITED STATES 2012 ARTICLE IV REPORT

INTERNATIONAL MONETARY FUND 55

2005 2006 2007 2008 2009 2010 2011 2012

1.5

2.0

2.5

3.0

3.5

4.0

4.5

90

92

94

96

98

100

102

Compensationand Unit 

Labor Costs

Wage inflation

(percent change over

one year; left)

Real Unit Labor Costs

(index, 2005:Q1=100,

right)

-4

-2

0

2

4

-4

-2

0

2

4

2007 2008 2009 2010 2011 2012

5-yr inflation expectation implied by TIPS

5-10 year forward inflation rate implied by 

TIPS

Inflation Expectations Implied by Inflation-Indexed

Treasury Securities

(percent)

2.0

2.5

3.0

3.5

4.0

2.0

2.5

3.0

3.5

4.0

2005 2006 2007 2008 2009 2010 2011 2012

Survey of Professional 

Forecasters annual 

average CPI inflation

rate over next 10-years

University of Michigan

Survey, 5-year ahead

median inflation 

expectations

Survey-based inflation expectations

(percent)

Figure 5. Core Inflation Remains Subdued

Sources: Board of Governors of the Federal Reserve System; Bureau of Labor Statistics; Bureau of Economic Analysis; University of 

Michigan; Federal Reserve Bank of Philadelphia; Haver Analytics; and Fund staff estimates.

-12

-8

-4

0

4

8

60

70

80

90

100

2005 2006 2007 2008 2009 2010 2011 2012

Core CPI inflation

(yr/yr pct; right)

Total CPI

inflation

(yr/yr pct; right)

Capacity utilization

(percent; left)

Inflation and Capacity

Headline inflation has slowed since September 2011 

as commodity prices decreased, while core inflation remains 

subdued, partly reflecting persistent economic slack.

Wage growth and real unit labor costs have decelerated 

sharply after the recession.

Investors' longer-term inflation expectations

remain stable ...

... as are those of consumers and forecasters.
2012 ARTICLE IV REPORT UNITED STATES 

56 INTERNATIONAL MONETARY FUND

-75

-50

-25

0

25

50

75

100

-75

-50

-25

0

25

50

75

100

2005 2007 2009 2011

Large & Medium Firms

Small Firms

Commercial Real Estate

Residential Real Estate

Consumer Loans

Lending Standards

(net percentage

tightening)

Figure 6. Slow Financial Sector Healing

Sources: Board of Governors of the Federal Reserve System; Bloomberg, LP; Haver Analytics; and Fund staff estimates. * The 

TED spread is three-month LIBOR less the three-month treasury bill yield. ** Counterparty risk is measured as the LIBOR-OIS 

spread. *** Liquidity risk is the OIS-treasury bill spread.

70

80

90

100

110

120

130

70

80

90

100

110

120

130

2010 2011 2012

S&P 500

S&P Financials

Equity Prices

(indexes, January 4, 2010 = 100)

0

30

60

90

120

0

200

400

600

800

2008 2009 2010 2011 2012

VIX

(implied 

volatility 

index; right)

TED 

spread*

Liquidity 

risk*** Counterparty

risk**

Measures of Financial Stress

(basis points)

0

10

20

30

40

0

10

20

30

40

2000 2003 2006 2009 2012

Private depository

institutions

Shadow

banks

Securities brokers

and dealers

Total Financial Assets of Financial Institutions

(trillions of dollars)

0

40

80

120

160

0

40

80

120

160

2007 2008 2009 2010 2011 2012

Other types of collateral

Auto loans

ABS Issuance

(billions of dollars)

Equities are up relative to last fall, even with a recent

setback on renewed concerns over Europe.

In fact, some measures of financial stress

are still somewhat elevated...

... while banks appear to remain reluctant to further

loosen their standards.

Instead of bank lending, corporations continue to raise 

funds in sizable amounts directly from the market...

... while non-banks continue to shed their assets... ... with securitization activity remaining very depressed.

-1,800

-1,200

-600

0

600

1,200

1,800

2,400

-1,200

-800

-400

0

400

800

1,200

1,600

2005 2007 2009 2011

Other Credit Market Instruments

Bank Loans ex Mortgages

Corporate Bonds

Credit Market Borrowing

and Bond 

Spreads

Investment Grade

Spread

(bps; right)

High-Yield

Spread

(bps; right)

Credit Market Flows

(bn dollars, s.a.a.r.; left):
 UNITED STATES 2012 ARTICLE IV REPORT

INTERNATIONAL MONETARY FUND 57

Figure 7. U.S. Public Finances Remain Unsustainable

Sources: Congressional Budget Office; Markit; Office of Management and Budget; Bureau of Economic Analysis; Centers for 

Medicare and Medicaid Services; Haver Analytics; and Fund staff estimates.

0

3

6

9

12

0

3

6

9

12

2010 2012 2014 2016 2018 2020 2022

President's FY2013 Budget Proposal

President's September 2012 plan

IMF Projection

Federal Budget Deficit Projections

(percent of GDP; fiscal years)

60

70

80

90

100

60

70

80

90

100

2010 2012 2014 2016 2018 2020 2022

President's FY2013 Budget Proposal

President's September 2012 plan

IMF Projection

Federal Debt Held by the Public

(percent of GDP; fiscal years)

0

1

2

3

4

5

6

7

8

0

1

2

3

4

5

6

7

8

10 210 410 610 810

10-year government bond yield (pct.)

5-year sovereign CDS spreads (bps)

End-2010

Jun 18, 2012

United 

States

Germany

France

Italy

Spain

Japan

Government Bond Yields and CDS Spreads

The federal budget deficit will temporarily fall as the economy 

recovers, stimulus unwinds, and defense spending shrinks ...

... however, IMF projections point to unsustainable debt 

dynamics over the medium term.

The United States remains a safe haven despite last year's 

rating downgrade by Standard and Poor's.

Health care spending growth has slowed down, 

although this is not unusual after recessions ...

... health care will remain the key budget threat in the 

longer term due to population aging and cost growth.

The revenue ratio is lower than most other advanced 

economies, suggesting scope for revenue-raising measures.

0

3

6

9

12

15

18

21

0

3

6

9

12

15

18

21

1980 1984 1988 1992 1996 2000 2004 2008

NBER 

recession

Health care 

consumption in

% of personal 

disposable income

Health care consumption

in % of nominal GDP

Public health care spending

in % of nominal GDP

Total health care

spending in % of

nominal GDP

Health Care Spending

0

2

4

6

8

10

12

0

2

4

6

8

10

12

2000 2005 2010 2015 2020 2025 2030 2035

Federal Spending on Major Health Care

Programs, Under CBO's 

Extended Baseline Scenario

(percent of GDP)

Medicaid,

CHIP, and Exchange

Subsidies

Medicare

AUS

CAN

JAP

Switzerland

GBR

USA

DNK

SWE

NOR

Euro area

25

30

35

40

45

50

55

60

65

25

30

35

40

45

50

55

60

65

25 30 35 40 45 50 55 60 65

2007

2011

General Government Revenue

in 2007 and 2011

(percent of GDP)
2012 ARTICLE IV REPORT UNITED STATES 

58 INTERNATIONAL MONETARY FUND

Figure 8. State and Local Governments Continue Fiscal Adjustment

Sources: Bureau of Economic Analysis; Bureau of Labor Statistics; Office of Management and Budget; Markit; Bank 

of America/Merrill Lynch; Board of Governors of the Federal Reserve System; Haver Analytics; and Fund staff 

calculations.

-50

-40

-30

-20

-10

0

10

20

30

40

50

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

2000 2002 2004 2006 2008 2010

Net investment (LHS)

Operating balance (LHS)

Net lending (LHS)

Main Indicators

(percent of GDP)

Gross Debt (RHS)

Net Debt (RHS)

7.8

8.1

8.4

8.7

9.0

9.3

0

6

12

18

24

30

1990 1993 1996 1999 2002 2005 2008 2011

Other (LHS)

Transport (LHS)

Utilities (LHS)

Hospitals (LHS)

State and Local Government Employment

(millions, unless noted otherwise)

Education

(left)

General Admin.

(left)

State and local 

gov't employment

(pct of population; RHS)

-15

-10

-5

0

5

10

15

20

-15

-10

-5

0

5

10

15

20

1998 2003 2008

Current tax receipts

Total receipts

Total expenditures

State and Local Government 

Revenues and Expenditures

(percent change, yr/yr)

2

4

6

8

10

2

4

6

8

10

2007 2008 2009 2010 2011 2012

AAA-rated municipal bonds

BBB-rated 

municipal

bonds 

AA-rated 

municipal 

bonds

20-year

Treasury 

note (taxable)

Government Bond Yields

(yield to maturity; percent)

State and local governments (SLGs) must maintain 

balanced operational budgets, which limited debt 

accumulation during the Great Recession.

Tax collections are gradually recovering, but the 

SLGs have grappled with the phase-out of 

federal aid...

... and continue to downsize their activities, 

including in education and other social services.

Many states have depleted reserve "rainy-day" 

funds and are vulnerable to revenue shortfalls.

Funding costs have generally declined, but the spreads 

over Treasuries fluctuate with general risk aversion and 

concerns about medium-term budgetary challenges.

The CDS spreads for lower-quality issuers 

remain elevated, but are below their 2010 peaks.

0

125

250

375

500

0

125

250

375

500

Sep-09 May-10 Jan-11 Sep-11 Jun-12

Virginia

California

United States

Illinois

CDS Spreads

(basis points)

0

5

10

15

20

25

30

0

5

10

15

20

25

30

< 0

0 - 22 - 5

5 - 10

> 10

Rainy Day Fund Balances

(percent of expenditures)

Rainy Day Funds

Number of States
 UNITED STATES 2012 ARTICLE IV REPORT

INTERNATIONAL MONETARY FUND 59

ANNEX I. UNITED STATES: DOWNSIDE RISK ASSESSMENT MATRIX

Nature/Source of 

Main Threats 

Overall Level of Concern 

Likelihood of Severe Realization 

of Threat in the Next 1–3 Years 

(high, medium, or low) 

Expected Impact if 

Threat is Realized 

(high, medium, or low)

1. “Fiscal cliff” Low 

Political gridlock could trigger a 

much larger fiscal withdrawal than 

envisaged in our baseline scenario. 

High 

A fiscal consolidation of over 

4 percent of GDP in 2013 would 

reduce annual growth to around 

zero.

2. Lack of 

medium term 

plan for fiscal 

consolidation 

Low 

Failure to agree on a credible plan 

to put the federal debt on a 

sustainable medium-term path 

could lead to a gradual erosion of 

the reserve currency status of the 

U.S. dollar and upward pressure on 

Treasury bond yields.

High 

Loss of confidence and higher 

interest rates would undermine the 

recovery of private domestic 

demand, and have severe financial 

market repercussions, domestically 

and internationally, given the central 

role played by US Treasuries in 

global financial markets. 

3. Weaker 

housing market 

Low 

Faster-than-anticipated 

transitioning of units in foreclosure 

into distressed sales 

Medium 

This could further weaken house 

prices in the near term. A 10 percent 

decline in house prices relative to 

the baseline would subtract about 

0.3 percent from 2013 growth.

4. Contagion 

from Euro area 

debt crisis 

Medium 

A significant worsening of the euro 

area debt crisis may affect the 

United States through trade and 

financial channels

Medium 

Impact would occur through the 

trade channel, and a tightening of 

financial conditions, including stress 

in MMMFs. 

 
2012 ARTICLE IV REPORT UNITED STATES 

60 INTERNATIONAL MONETARY FUND

ANNEX II. UNITED STATES: PUBLIC SECTOR DEBT SUSTAINABILITY ANALYSIS (DSA) 

1. Congress has legislated about $2.1 trillion in medium-term fiscal consolidation 

measures. 

 The Budget Control Act adopted in August 2011 capped discretionary spending, saving 

about $900 bn over 10 years relative to the CBO baseline. 

 The Act will trigger additional savings in the form of automatic appropriations cuts 

(“sequester”) worth $1.2 trillion over 10 years. Unless modified by Congress, the cuts are 

scheduled to come into effect in January 2013. 

2. Despite these substantial legislated savings, U.S. public finances remain on an 

unsustainable trajectory. Under the staff’s baseline 

projection which includes medium-term savings from 

the Budget Control Act as well as an assumption of 

additional modest deficit-reduction measures 

enacted from 2014, the debt ratio temporarily 

stabilizes around the mid-decade, but starts rising 

again later given the spending pressures from aging 

population and excess cost growth in the health care 

sector. Federal debt held by the public is projected to 

increase from about 70 percent of GDP now to 

around 85 percent of GDP in FY2022, with general 

government gross debt approaching 120 percent of 

GDP by CY2021. 

3. Furthermore, the fiscal projections are being substantially improved by the current low 

interest rates environment. Reflecting the weak economy, highly accommodative monetary policy, 

and the safe haven status of the United States, real interest rates have fallen well below GDP growth. 

As a result, the debt-stabilizing primary balance is currently negative (Annex Table) and will remain 

so over the standard 5-year DSA horizon despite the staff’s projection for a substantial increase in 

Treasury yields over the medium term. In staff’s view, however, aiming for a medium-term primary 

surplus of at least 1 percent of GDP would be appropriate to put the public debt ratio firmly on a 

downward path, while building a sufficient margin for the higher interest costs of public debt 

(Treasury bond yields are projected to continue growing beyond the 5-year DSA window). As 

discussed in the IMF’s Fiscal Monitor, the targeted primary surplus would be even higher in the long 

run to bring the debt ratio closer to the pre-crisis levels by 2030. 

4. Sensitivity analysis. The analysis in Annex Figure suggests that the public debt dynamics is 

highly sensitive to growth and interest rate assumptions, primarily reflecting the fact that the U.S. 

public ratio already exceeds 100 percent of GDP. 

50

60

70

80

90

100

110

120

130

140

50

60

70

80

90

100

110

120

130

140

2010 2014 2018 2022

Staff's adjustment scenario 1/

Federal government

Federal and General Government Debt Ratio 

(percent of GDP)

Source: Congressional Budget Office; and Fund staff estimates.

1/ Assumes structural primary withdrawal of about 1 percent of 

GDP annually until a primary balance of 1 percent of GDP for 

general government is reached in 2018.

General government

Staff's baseline forecast
Projections

2007 2008 2009 2010 2011 2012 2013 2014 2015 20

1 Baseline: Public sector debt 1/ 67.2 76.1 89.9 98.4 102.8 106.7 110.7 112.7 113.0 1

o/w foreign-currency denominated 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 

2 Change in public sector debt 0.5 9.0 13.7 8.6 4.4 3.9 4.0 2.0 0.3 3 Identified debt-creating flows (4+7+12) -0.3 5.5 15.0 6.9 5.9 3.8 4.0 1.7 0.0 4 Primary deficit (includes interest receipts) -0.2 3.9 10.4 7.7 6.7 5.4 3.9 2.1 1.0 5 Revenue and grants including interest receipts 33.9 32.5 30.9 31.7 31.8 31.5 32.9 33.8 34.6 6 Primary (noninterest) expenditure 33.7 36.4 41.4 39.4 38.5 36.9 36.8 35.9 35.6 7 Automatic debt dynamics 2/ -0.1 1.6 4.6 -0.9 -0.8 -1.1 -1.0 -1.5 -2.1 8 Contribution from interest rate/growth differential 3/ -0.1 1.6 4.6 -0.9 -0.8 -1.1 -1.0 -1.5 -2.1 9 Of which contribution from real interest rate 1.1 1.4 1.8 1.7 0.8 0.9 1.4 1.5 1.5 

10 Of which contribution from real GDP growth -1.2 0.2 2.7 -2.6 -1.6 -2.0 -2.3 -3.0 -3.6 11 Contribution from exchange rate depreciation 4/ 0.0 0.0 0.0 0.0 0.0 ... ... ... ... 12 Other identified debt-creating flows 0.0 0.0 0.0 0.0 0.0 -0.5 1.1 1.0 1.0 13 Privatization receipts (negative) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 14 Recognition of implicit or contingent liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 15 Federal student loans, incurrence of other gross liabilities 0.0 0.0 0.0 0.0 0.0 -0.5 1.1 1.0 1.0 16 Residual, including asset changes (2-3) 5/ 0.9 3.5 -1.2 1.7 -1.5 0.1 0.0 0.3 0.3 

Public sector debt-to-revenue ratio 1/ 198.0 234.2 290.5 311.0 323.2 338.6 336.6 333.4 326.6 3Scenario with key variables at their historical averages 7/ 106.7 111.4 116.4 121.4 1Scenario with no policy change (constant primary balance) in 2012-2017 106.7 112.2 117.5 122.1 1Key Macroeconomic and Fiscal Assumptions Underlying BaselineReal GDP growth (in percent) 1.9 -0.3 -3.5 3.0 1.7 2.0 2.3 2.8 3.3 Average nominal interest rate on public debt (in percent) 8/ 4.7 4.3 3.4 3.2 3.1 2.8 2.8 2.9 3.1 Average real interest rate (nominal rate minus change in GDP deflator, in percent) 1.8 2.1 2.3 2.0 0.9 1.0 1.4 1.5 1.5 Nominal appreciation (increase in US dollar value of local currency, in percent) 0.0 0.0 0.0 0.0 0.0 ... ... ... ... Inflation rate (GDP deflator, in percent) 2.9 2.2 1.1 1.2 2.1 1.8 1.4 1.4 1.6 Growth of real primary spending (deflated by GDP deflator, in percent) 3.9 7.5 9.7 -1.9 -0.6 -2.1 1.9 0.3 2.5 Primary deficit -0.2 3.9 10.4 7.7 6.7 5.4 3.9 2.1 1.0 

1/ Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.2/ Derived as [(r - (1+g - g + (1+r]/(1+g++g)) times previous period debt ratio, with r = interest rate;  = growth rate of GDP deflator; g = real GDP growth rate;  = share of foreign-currency 

denominated debt; and  = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

3/ The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

4/ The exchange rate contribution is derived from the numerator in footnote 2/ as (1+r). 

5/ For projections, this line includes exchange rate changes.6/ Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period. 7/ The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.8/ Derived as nominal interest expenditure divided by previous period debt stock.9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Actual 

Annex Table. United States: Public Sector Debt Sustainability Framework, 2007–2017

(In percent of GDP, unless otherwise indicated)

INTERNATIONAL MONETARY FUND 61
2012 ARTICLE IV REPORT UNITED STATES 

62 INTERNATIONAL MONETARY FUND

Growth 

shock 

124

Baseline 113

40

50

60

70

80

90

100

110

120

130

140

2007 2009 2011 2013 2015 2017

Growth Shock

PB shock 

122

Baseline113

131

40

50

60

70

80

90

100

110

120

130

140

2007 2009 2011 2013 2015 2017

Primary Balance Shock

and No Policy

Change Scenario

Baseline 113

40

50

60

70

80

90

100

110

120

130

140

2007 2009 2011 2013 2015 2017

Interest Rate Shock

Sources: International Monetary Fund, country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. For interest 

rates, an additional scenario with a 2 standard deviation shock is also considered. Figures in the boxes represent average 

projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the 

variable is also shown.

2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to 

project debt dynamics five years ahead.

3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.

4/ A standard 10 percent of GDP shock to contingent liabilities is assumed to occur in 2013.

Historical

132

Baseline

113

40

50

60

70

80

90

100

110

120

130

140

2007 2009 2011 2013 2015 2017

Baseline and Historical Scenarios

121

Baseline 113

40

50

60

70

80

90

100

110

120

130

140

2007 2009 2011 2013 2015 2017

Combined Shock

Combinedshock

Baseline 113

122

40

50

60

70

80

90

100

110

120

130

140

2007 2009 2011 2013 2015 2017

Contingent

Liabilities Shock

Contingent 

liabilities shock

No policy

change

Interest rate 

scenarios 120

Annex Figure. Public Debt Sustainability: Bound Tests 1/ 2/ 

(Public debt in percent of GDP)
 

UNITED STATES 

STAFF REPORT FOR THE 2012 ARTICLE IV 

CONSULTATION—INFORMATIONAL ANNEX

Prepared By The Western Hemisphere Department 

I. Fund Relations _________________________________________________________________________ 2 

II. Statistical Issues ________________________________________________________________________ 4 

CONTENTS 

July 13, 2012 
2012 ARTICLE IV REPORT—INFORMATIONAL ANNEX UNITED STATES

2 INTERNATIONAL MONETARY FUND

Annex I. United States: Fund Relations 

(As of May 31, 2012) 

I. Membership Status: Joined 12/27/45; Article VIII 

 Percent

II. General Resources Account: SDR Million Quota

 Quota 42,122.40 100.00 

 Fund holdings of currency 27,023.98 64.16 

 Reserve position in Fund 15,099.45 35.85 

 Lending to the Fund 

 New Arrangements to Borrow 7,048.64 

 Percent

III. SDR Department: SDR Million Allocation

 Net cumulative allocation 35,315.68 100.00 

 Holdings 35,808.14 101.39 

IV. Outstanding Purchases and Loans: None 

V. Financial Arrangements: None 

VI. Projected Obligations to Fund: None 

VII. Exchange Rate Arrangements: The exchange rate of the U.S. dollar floats independently 

and is determined freely in the foreign exchange market. 

VIII. Payments Restrictions. The United States accepted Article VIII of the IMF's Articles of 

Agreement and maintains an exchange system free of restrictions and multiple currency practices 

with the exception of limited restrictions on certain payments and transfers imposed for security 

reasons. The United States currently administers approximately 30 economic sanctions programs, 

which restrict certain payments and transfers for transactions against particular foreign 

governments, entities, and individuals. The United States administers, inter alia, sanctions programs 

relating to Burma, Cuba, Iran, North Korea, and Sudan, and continues to block certain previously 

frozen assets of the former Yugoslavia. Several other sanctions programs, including those relating to 

Côte d’Ivoire, Liberia, Somalia, Syria, Western Balkans, and Zimbabwe are “list-based” programs, 

affecting only members of certain government regimes and other individuals and groups whose 
UNITED STATES 2012 ARTICLE IV REPORT—INFORMATIONAL ANNEX 

INTERNATIONAL MONETARY FUND 3

activities have been determined to threaten the foreign policy or economy of the United States. The 

United States also implements similar list-based sanctions programs against: narcotics traffickers; 

terrorism-related governments, entities, and individuals; and proliferators of weapons of mass 

destruction. 

IX. Article IV Consultation. The 2011 Article IV consultation was concluded in July 2011 and 

the Staff Report was published as IMF Country Report No. 11/201. A fiscal ROSC was completed in 

the context of the 2003 consultation. An FSAP involved two missions, during October 14–November 

3, 2009 and February 17–March 12, 2010. The FSSA was discussed at the board, together with the 

2010 Article IV Consultation, on July 26, 2010. 

The 2012 Article IV discussions were conducted from May 21–June 8, 2012. Concluding meetings 

with Treasury Secretary Geithner and Chairman Bernanke of the Board of Governors of the Federal 

Reserve System occurred on June 27 and July 3rd, respectively. The Managing Director, Ms. Lagarde, 

and WHD Director, Mr. Eyzaguirre, participated in the concluding meetings. A press conference on 

the consultation was held on July 3, 2012. The team comprised (at different times) Gian Maria MilesiFerretti (head), Roberto Cardarelli, Oya Celasun, Francesco Columba, Jihad Dagher, Geoffrey Keim, 

Eric Le Borgne, Paulo Medas, Martin Sommer, and Julien Reynaud (all WHD); Sally Chen (SPR); and 

Stephen Smith (MCM), with contributions from Jack Grigg, Thornton Matheson, and Ian Parry (FAD); 

Nadia Rendak, Andrew Giddings, Yan Liu, Steve Dawe and Emmanuel Mathias (LEG); John Kiff 

(MCM), Ranil Salgado, Marshall Mills, Katrin Elborgh-Woytek and Lars Engstrom (SPR). 

Ms. Lundsager (Executive Director) and Mr. Lindquist (Advisor) attended some of the meetings. 

Outreach included discussions with the private sector and think tanks. Unless an objection from the 

authorities of the United States is received prior to the conclusion of the Board’s consideration, the 

document will be published. 
2012 ARTICLE IV REPORT—INFORMATIONAL ANNEX UNITED STATES

4 INTERNATIONAL MONETARY FUND

Annex II. Statistical Issues 

Statistical Issues: Comprehensive economic data are available for the United States on a timely 

basis. The quality, coverage, periodicity, and timeliness of U.S. economic data are adequate for 

surveillance. Coverage of international capital flows in external sector statistics has been improved, 

with the June 2007 releases of BOP and IIP data on financial derivatives. The United States has 

subscribed to the Special Data Dissemination Standard (SDDS) and its metadata are posted on the 

Dissemination Standard Bulletin Board (DSBB). 

United States: Table of Common Indicators Required for Surveillance 

(As of June 22, 2012) 

 Date of 

latest 

observation 

Date 

received 

Frequency 

of data1

Frequency of 

reporting1

Frequency of 

publication1

Exchange rates June 15 June 18 D W W

International reserve assets and reserve 

liabilities of the monetary authorities2

June 15 June 15 W W W

Reserve/base money June 13 June 21 B W W

Broad money June 11 June 21 W W W

Central bank balance sheet June 20 June 21 W W W

Interest rates3 same day same day D D D

Consumer price index May 2012 June 14 M M M

Revenue, expenditure, balance and 

composition of financing4

—general 

government5

2012 Q1 May 31 Q Q Q

Revenue, expenditure, balance and 

composition of financing4—central 

government 

May 2012 June 12 M M M

Stocks of central government and central 

government-guaranteed debt 

May 2012 June 6 M M M

External current account balance 2012 Q1 June 14 Q Q Q

Exports and imports of goods and 

services 

Apr. 2012 June 8 M M M

GDP/GNP (2nd release) 2012 Q1 May 31 Q M M

Gross External Debt 2011 Q4 March 31 Q Q Q

International Investment Position6 2010 June 28 A A A

 

1

 Daily (D), Weekly (W), Biweekly (B), Monthly (M), Quarterly (Q), Annually (A); NA: Not Available. 

2

 Includes reserve assets pledged or otherwise encumbered as well as net derivative positions. 

3

 Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, 

notes and bonds. 

4

 Foreign, domestic bank, and domestic nonbank financing. 

5

 The general government consists of the central government (budgetary funds, extra budgetary funds, and social 

security funds) and state and local governments. 

6

 Includes external gross financial asset and liability positions vis-à-vis nonresidents. 
UNITED STATES 

STAFF REPORT FOR THE 2012 ARTICLE IV 

CONSULTATION—SUPPLEMENTARY INFORMATION 

Approved By Gian Maria Milesi-Ferretti and Tamim Bayoumi 

This Supplement contains additional information on staff estimates of current account and 

real exchange rate gaps, capital flows, reserve policies, and the international investment 

position (IIP) that underpin the exchange rate assessments presented in the Staff Report (¶46 

and Box 8). On the first two criteria, the estimates rely on CGER methodologies (as described 

in IMF Occasional Paper 267), as well as EBA methodologies (as described in an annex of the 

Pilot External Assessment Report (www.imf.org). 

• CGER estimates have been updated to take into account changes in real exchange 

rates and macroeconomic projections between the reference period for the Spring 2012 

World Economic Outlook (on which the estimates are based) and June 2012, as well as staff’s 

estimates for trade elasticities. 

• EBA estimates have been updated to reflect changes in real exchange rates, 

underlying current account estimates, and other fundamentals between the period for which 

the gap is estimated (the year 2011 for the current account regression, the Spring 2012 WEO 

reference period for the real exchange rate regression) and June 2012. 

The estimates are presented in the Table below. Overall, they are consistent with staff’s 

assessment of a current account deficit 1–2 percentage points of GDP weaker than the value 

implied by fundamentals and desirable policies in the U.S. and its trading partners and with 

staff’s view of a moderate real exchange rate overvaluation (0–15 percent). 

Turning to the other three criteria, the United States has a negative IIP (particularly large in 

debt securities), continued net portfolio debt inflows, and low levels of reserves. While these 

would normally imply a significant potential vulnerability, risks are limited given the dollar’s 

role as the world’s major reserve currency and associated safe haven status. 

July 27, 2012 
2012 ARTICLE IV REPORT—SUPPLEMENTARY INFORMATION UNITED STATES

2 INTERNATIONAL MONETARY FUND

2011 Spring 2012

CA 

regression

REER 

regression

MB ES 1/ ERER 

Current account norm (percent of GDP) -2.0 -2.5 -1.6

Current account gap (percent of GDP) 2/ -1.7 / -2.2 -1.1 -2

Exchange rate gap as of estimation period (percentage points) -9 / -12 -2 6 13 2

Exchange rate gap as of June 2012 (percentage points) -13 / -16 1 6 13 5

Memorandum items (percent of GDP, unless otherw ise noted): 

Percentage change in REER betw een June 2012 and 2011 average 4

Percentage change in REER betw een June 2012 and Spring 2012 WEO reference period 3

Current account balance (2011) -3.1

Cyclically adjusted current account balance (EBA -- 2011) -4.2

Projected medium-term current account balance (2017) -3.6

2/ Difference betw een cyclically-adjusted or medium-term current account balance and CA norm. For EBA figures show the CA gap excluding and including 

the regression residual

Model-based Current Account and Exchange Rate Assessments

Medium term (2017)

EBA CGER

1/ Calculated on the basis of the end-2011 net IIP (-26.7 percent of GDP)
Statement by the IMF Staff Representative on the United States 

July 30, 2012 

1. This note reports on information that has become available since the staff report 

(SM/12/192) was issued and does not alter the thrust of the staff appraisal. 

2. Data released since the completion of the Article IV consultation in early July 

point to a slowdown in near-term growth. Annualized real GDP growth is estimated at 

1.5 percent for the second quarter, marginally lower than staff’s projection of 1.7 percent and 

lower than the 2 percent growth estimated for the first quarter. The deceleration was largely 

due to a slowdown in private consumption growth, likely reflecting the run up in gasoline 

prices through April, and slower job creation and lower income expectations in the face of 

growing uncertainty. The national accounts revisions released on July 27th indicate that 

growth was lower in 2010 and higher in 2011 than previously thought. 

3. On July 18, 2012, the Financial Stability Oversight Council (FSOC) designated 

eight financial market utilities as systemically important, subjecting them to Fed 

supervision and heightened prudential standards. The designated utilities perform a variety of 

functions, including the clearing and settlement of cash, securities, and derivatives 

transactions. On the same date, the FSOC published its second annual report, followed by the 

issuance of the inaugural annual report of the U.S. Treasury’s Office of Financial Research 

on July 20th. The potential threats to U.S. financial stability identified in these reports are 

largely in line with those highlighted in the Staff Report. 

4. Financial conditions do not appear to have changed noticeably since the end of 

the consultation, despite intensified financial stresses in the euro area. Second-quarter 

earnings for major U.S. financial institutions were mostly above expectations, mainly as 

lower provisioning expenses offset the negative impact of lower trading profits, sluggish loan 

growth, and low interest rates. The pick-up in mortgage refinancing activity under the Home 

Affordable Refinancing Program has also boosted revenues. CDS spreads on major U.S. 

banks and equity prices for financial institutions remain around their end-June levels. 

5. Two notable analytical reports have been published on the fiscal policy front. 

First, the Congressional Budget Office and the Joint Committee on Taxation have examined 

implications of the recent Supreme Court ruling on health care reform. Since the ruling has 

effectively allowed states to choose whether to expand eligibility for coverage under their 

Medicaid program, it is projected that about 3 million more people than initially estimated 

will remain uninsured once the reform is implemented, implying lower federal government 

spending (around $84 billion over a decade). Second, a task force headed by Richard Ravitch 

and Paul Volcker highlighted well-known problems with state and local budgets, such as 

unfunded pension and health care liabilities and lack of transparency in accounting practices. 

Many of the task force recommendations are in line with those of staff—as described, for 

example, in the Selected Issues Paper “Fiscal Challenges Facing the U.S. State and Local 

Governments” (IMF Country Report No. 11/202). 
Public Information Notice (PIN) No. 12/93 

FOR IMMEDIATE RELEASE 

August 2, 2012 

IMF Executive Board Concludes 2012 Article IV Consultation with the 

United States 

On July 30, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the 

Article IV consultation with the United States.1

 

Background 

The U.S. economy continues to grow at a tepid pace of around 2 percent, employment remains 

well below pre-crisis levels, and the housing market is stabilizing but remains depressed. Strong 

headwinds persist on private consumption, as households continue to deleverage amid weak—

albeit stabilizing—house prices. Business fixed investment seems to have lost some momentum 

recently, despite the extraordinarily low borrowing costs and relatively favorable financial 

conditions facing the corporate sector. Residential construction has been improving, but from very 

low levels. Exports decelerated throughout the last year, in line with generally slower growth in 

foreign demand. The U.S. current account deficit has remained broadly stable. Overall, the slow 

pace of the recovery is consistent with past international experience in the aftermath of housing 

and financial crises. 

Monetary policy remains highly accommodative, and the Federal Reserve responded to weakerthan-expected growth over the past year with a number of easing actions. Fiscal policy has begun 

weighing on growth, as the budget deficit is being gradually reduced. Continued progress has 

been made on implementation of the financial reform program, in line with the Dodd-Frank Act as 

well as the international regulatory reform agenda. 

 

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually 

every year. A staff team visits the country, collects economic and financial information, and discusses with 

officials the country's economic developments and policies. On return to headquarters, the staff prepares a 

report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the 

Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary 

is transmitted to the country's authorities.

International Monetary Fund 

700 19th Street, NW 

Washington, D. C. 20431 USA 
2

Growth is likely to remain moderate in 2012 and 2013, constrained by household deleveraging, 

fiscal restraint, and subpar global demand. Following a robust rebound after the recession, 

private investment in equipment and software is projected to expand at a slower pace, though it 

will remain a strong contributor to growth. After six consecutive years of declines, residential 

investment is projected to start making positive contributions to growth. A stronger dollar and 

weaker global demand are projected to weigh on exports. Headline and core inflation are 

projected to remain subdued, reaching the Federal Reserve’s 2 percent goal over the medium 

term. Downside risks around the outlook have intensified, including from the worsening of the 

euro area debt crisis as well as the uncertainty over domestic fiscal plans. On the financial sector 

front, the outlook for the U.S. banking system is broadly positive but subject to risks from an 

intensification of stresses in global financial markets. 

With regard to policy actions, the Federal Reserve has indicated that economic conditions are 

likely to warrant exceptionally low levels of the federal funds rate at least through late 2014, and 

unveiled plans to further extend the average maturity of its securities holdings. The authorities 

recently enacted measures to ease mortgage modifications and refinancing. Last summer, 

Congress legislated budgetary savings worth about $2.1 trillion over the next decade, but 

negotiations regarding additional measures to reduce deficits over the medium term have been 

unsuccessful so far. The fiscal outlook for next year is extraordinarily uncertain given the large 

number of expiring tax provisions and scheduled automatic spending cuts. 

Executive Board Assessment 

Executive Directors welcomed the continuing moderate economic recovery in the United States, 

while noting the downside risks to the outlook stemming from external and domestic 

uncertainties. Directors called on U.S. policymakers to use effectively the limited policy space 

available to support the recovery in the near term and restore medium term fiscal sustainability 

with a balanced approach to consolidation. This will be important also to assist the global 

recovery, given the systemic importance of the United States. 

Directors highlighted the need to adopt a measured pace of deficit reduction that does not sap the 

recovery. In particular, Directors agreed that removing the uncertainty created by the “fiscal cliff” 

in 2013 and promptly raising the debt ceiling are both critical. They stressed the importance of 

agreeing as early as possible on a comprehensive medium term fiscal consolidation plan, based 

on both higher revenues and lower entitlement spending, that would stabilize the debt ratio by 

mid decade and gradually reduce it afterwards. 

Directors broadly agreed that monetary policy will need to remain highly accommodative for quite 

some time. Most Directors considered that there is room for further easing should the outlook 

deteriorate, although a number of Directors observed that the effectiveness of additional 

monetary easing could be limited in the prevailing very low interest rate environment. Some 
3

Directors highlighted the potential adverse global spillover effects of very low interest rates 

through capital flows and higher commodity prices. Directors also noted that, while the United 

States external current account deficit has declined, the external position remains weaker than 

justified by fundamentals and desired policies. 

Directors welcomed the recent actions and proposals by the Administration to bolster the housing 

market, and urged their timely and aggressive implementation. Given the importance of the 

housing sector to the economic recovery, Directors concurred that further measures may be 

needed, including measures to facilitate the conversion of foreclosed houses into rental units, 

allowing mortgages to be modified in personal bankruptcy courts, and facilitating refinancing on a 

larger scale. 

Directors welcomed the slowly improving conditions in the labor market. They noted that 

persistently high long term unemployment creates the risks of human capital losses and reduced 

attachment to the labor force. They concurred that training and job-search support should be 

adequately funded, and temporary tax incentives should be implemented to help reduce long 

term unemployment. 

Directors commended the authorities for the significant progress achieved over the past year in 

implementing domestic and international financial reforms. They emphasized the need to 

increase the resilience of the U.S. financial system, including by strengthening the regulation of 

money market mutual funds, finalizing the Volcker Rule with due consideration of its cross border 

implications, accelerating the adoption of Basel III capital rules, and winding down the role of 

government-sponsored entities. They encouraged the authorities to strengthen coordination of 

financial sector regulation and supervision, and to allocate appropriate resources to regulatory 

and supervisory agencies. 

Directors stressed the importance of a multilateral approach to economic policy management in 

the United States, and commended the United States for its active engagement in fostering 

international coordination on financial regulatory reforms. They underscored that the United 

States can make important contributions to global growth and stability by adopting a credible 

medium term plan for fiscal consolidation at a pace that does not undermine the recovery, as well 

as by further strengthening its financial sector. Directors welcomed the authorities’ continued 

commitment to secure the success of multilateral trade negotiations. 

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views 

and analysis of economic developments and policies. With the consent of the country (or countries) 

concerned, PINs are issued after Executive Board discussions of Article IV consultations with member 

countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post 

assessments of member countries with longer-term program engagements. PINs are also issued after 

Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a 

particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2012 Article 

IV Consultation with the United States is also available.
4

United States: Selected Economic Indicators 

(annual change in percent, unless otherwise indicated) 

Projections 

2007 2008 2009 2010 2011 2012 2013

National production and income 

 Real GDP 1.9 -0.3 -3.5 3.0 1.7 2.0 2.3

 Net exports 1/ 0.6 1.2 1.1 -0.5 0.0 -0.1 -0.2

 Total domestic demand 1.2 -1.5 -4.4 3.4 1.6 2.0 2.3

 Final domestic demand 1.4 -1.0 -3.6 1.8 1.8 1.9 2.3

 Private final consumption 2.3 -0.6 -1.9 2.0 2.2 2.2 2.3

 Public consumption expenditure 1.3 2.2 2.0 0.9 -1.2 -2.1 -2.0

 Gross fixed domestic investment -1.4 -5.1 -15.2 2.0 3.7 4.8 6.8

 Private fixed investment -1.9 -7.1 -18.8 2.6 6.8 6.6 8.3

 Residential structures -18.7 -23.9 -22.2 -4.3 -1.3 10.4 12.8

 Public fixed investment 1.7 4.6 0.3 -0.3 -6.7 -2.0 0.8

 Change in private inventories 1/ -0.2 -0.5 -0.8 1.6 -0.2 0.2 0.1

 GDP in current prices 4.9 1.9 -2.5 4.2 3.9 3.9 3.7

Employment and inflation 

 Unemployment rate 4.6 5.8 9.3 9.6 9.0 8.2 7.9

 CPI inflation 2.9 3.8 -0.3 1.6 3.1 2.2 1.7

 GDP deflator 2.9 2.2 1.0 1.1 2.1 1.8 1.4

Government finances 

 Federal government (budget, fiscal years) 

 Federal balance (percent of GDP) -1.2 -3.2 -11.6 -9.7 -9.0 -7.5 -6.0

 Debt held by the public (percent of GDP) 36.3 40.5 54.1 62.8 67.7 73.0 77.1

 General government (GFSM 2001, calendar years) 

 Net lending (percent of GDP) -2.7 -6.7 -13.0 -10.5 -9.6 -8.2 -6.8

 Structural balance (percent of potential nominal GDP) -3.3 -5.5 -7.9 -8.1 -7.5 -6.3 -5.0

 Gross debt (percent of GDP) 67.2 76.1 89.9 98.4 102.8 106.7 110.7

Interest rates (percent) 

 Three-month Treasury bill rate 4.5 1.4 0.2 0.1 0.1 0.1 0.1

 Ten-year government bond rate 4.6 3.7 3.3 3.2 2.8 2.1 2.8

Balance of payments 

 Current account balance (billions of dollars) -710 -677 -382 -442 -466 -491 -479

 Percent of GDP -5.1 -4.7 -2.7 -3.0 -3.1 -3.1 -2.9

 Merchandise trade balance (billions of dollars) -819 -830 -506 -645 -738 -769 -817

 Percent of GDP -5.8 -5.8 -3.6 -4.4 -4.9 -4.9 -5.0

 Balance on invisibles (billions of dollars) 109 153 124 203 272 278 338

 Percent of GDP 0.8 1.1 0.9 1.4 1.8 1.8 2.1

Saving and investment (percent of GDP) 

 Gross national saving 14.6 13.4 11.5 12.5 12.9 13.3 14.1

 Gross domestic investment 19.6 18.1 14.7 15.8 15.9 16.4 17.1

Sources: Haver Analytics and IMF staff estimates. 

1/ Contribution to real GDP growth, percentage points.