©2013 International Monetary Fund 

IMF Country Report No. 13/236 

UNITED STATES 

2013 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 2013 Article IV consultation with United 

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

 Staff Report for the 2013 Article IV consultation, prepared by a staff team of the IMF, 

following discussions that ended on May 17, 2013, 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 9, 2013. 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 prepared by the IMF. 

 Staff Statement of July 24, 2013 updating information on recent developments. 

 Press Release summarizing the views of the Executive Board as expressed during its 

July 24, 2013 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. 

July 2013 
UNITED STATES 

STAFF REPORT FOR THE 2013 ARTICLE IV CONSULTATION 

KEY ISSUES 

Context: The U.S. economic recovery remains modest but is gaining ground, supported 

by a rebound in the housing market, still easy financial conditions, and a boost to 

household net worth from higher house and stock prices. These factors are helping to 

offset the impact of strong fiscal adjustment on consumer spending. But the economy is 

still far from normal conditions, with high unemployment and a large negative output 

gap. 

Fiscal Policy: The fiscal consolidation should be more balanced and gradual. The 

automatic spending cuts (sequester) not only reduce growth in the short term but could 

also undermine potential in the medium term through indiscriminate cuts to education 

and infrastructure. They should be replaced with back-loaded entitlement savings and 

new revenues. Even though the fiscal deficit is declining rapidly, approving a plan to 

restore long-run fiscal sustainability remains a priority. Early action is needed for 

measures that slow entitlement spending, as their effects build gradually over time. 

Monetary Policy: Given the still-large output gap and well-anchored inflation 

expectations, the highly accommodative monetary policy stance is appropriate. While 

unwinding monetary policy accommodation is likely to present challenges, including for 

financial stability, the Fed has a range of tools to help manage the exit. Effective 

communication and careful timing will be critical to avoid disruptions, for both the 

United States and other countries. 

Financial Outlook and Reforms: The protracted period of low interest rates may have 

raised vulnerabilities in the financial sector, which warrant close monitoring. While 

progress on financial reform has been made, reforms need to be completed in a number 

of areas. Domestic reforms should be coordinated with the global financial reform 

agenda, as this would help to reduce fragmentation of the global financial regulatory 

landscape. 

July 9, 2013 
UNITED STATES

2 INTERNATIONAL MONETARY FUND

Approved By 

Alejandro Werner and 

Vivek Arora 

Discussions took place in Washington, D.C., during May 6–May 17, 

2013 with concluding meetings on May 31 and June 12, 2013. The 

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

Martin Sommer, Francesco Columba, Deniz Igan, Gabriel Di Bella, 

Jarkko Turunen (all WHD); Rebecca McCaughrin (MCM); Chris 

Papageorgiou (SPR); and Tao Wu (ICD). Steve Dawe and Emmanuel 

Mathias (LEG), and Marshall Mills, Katrin Elborgh-Woytek, Lars 

Engstrom, and Michele Ruta (SPR) also participated in some meetings. 

CONTENTS 

BACKDROP: STILL A MODEST RECOVERY BUT WITH SOME BRIGHT SPOTS __________________ 4 

OUTLOOK AND RISKS ____________________________________________________________________________ 8 

POLICY DISCUSSIONS __________________________________________________________________________ 11

A. Outlook _______________________________________________________________________________________ 11

B. Fiscal Policy ____________________________________________________________________________________ 12

C. Monetary Policy _______________________________________________________________________________ 16

D. Housing Policy ________________________________________________________________________________ 18

E. Challenges Facing the Labor Market __________________________________________________________ 20

F. Financial Sector Conditions and Policies _______________________________________________________ 21

G. The United States and the World Economy ___________________________________________________ 26

STAFF APPRAISAL ______________________________________________________________________________ 28

BOXES 

1. U.S. Household Balance Sheets After Five Years of Repair _____________________________________ 32

2. Unconventional Energy Boom and "Manufacturing Renaissance" _____________________________ 33

3. External Sector Developments and External Stability Assessment _____________________________ 34

FIGURES 

1. Growth and Inflation __________________________________________________________________________ 41

2. Housing Sector ________________________________________________________________________________ 42

3. Labor Market __________________________________________________________________________________ 43

4. Financial Sector ________________________________________________________________________________ 44

5. Public Finances ________________________________________________________________________________ 45

6. State and Local Governments _________________________________________________________________ 46

7. The Dollar, Financial Flows, and Trade _________________________________________________________ 47
UNITED STATES

INTERNATIONAL MONETARY FUND 3

TABLES 

1. Selected Economic Indicators _________________________________________________________________ 36

2. Balance of Payments __________________________________________________________________________ 37

3. Federal and General Government Finances ____________________________________________________ 38

4a. General Government Statement of Operations ______________________________________________ 39

4b. General Government Financial Assets and Liabilities _________________________________________ 39

5. Indicators of External and Financial Vulnerability ______________________________________________ 40

ANNEXES 

I. Risk Assessment Matrix ________________________________________________________________________ 48

II. Public Sector Debt Sustainability Analysis (DSA) ______________________________________________ 49

ANNEX TABLE 

Public Sector Debt Sustainability Framework, 2008–18 _________________________________________ 51 

ANNEX FIGURE 

Public Debt Sustainability: Bound Tests _________________________________________________________ 52 
UNITED STATES

4 INTERNATIONAL MONETARY FUND

BACKDROP: STILL A MODEST RECOVERY BUT WITH 

SOME BRIGHT SPOTS 

1. The U.S. recovery has remained tepid, but underlying fundamentals have been steadily 

improving. Last year’s modest growth of 2.2 percent reflects legacy effects from the financial crisis, 

continued fiscal consolidation, a weak external environment, and temporary effects of extreme 

weather-related events. The economy grew at an annual rate of 1.8 percent in the first quarter of 

2013, held down by sharp cuts in public spending, and recent economic indicators suggest that 

growth has remained weak in the second quarter of the year. These developments notwithstanding, 

the nature of the recovery appears to be changing: 

 The housing sector has improved significantly. House prices have sharply rebounded, and, as 

of May, were about 10 percent above their level a year ago (but still 20 percent below the precrisis peak in nominal terms). While the increase was broad-based nationally, house prices have 

generally increased the most in regions where their decline had been the strongest, suggesting 

that prices are catching up after the collapse experienced during the Great Recession. 

Residential construction has recently grown at a double-digit pace, contributing 0.3 percentage 

points (pp) to growth last year, but the level of activity—21⁄2 percent of GDP in 2012—remains 

well below its long-term average of 41⁄2 percent. 

 Household balance sheets strengthened

(see Box 1). In addition to house prices, stock 

prices also increased sharply—the stock 

market reached a 5-year high in May. 

Together with continued progress in 

reducing debt, this contributed to a further 

improvement in household net worth (Chart). 

 Labor market conditions have been 

improving, though they are still far from 

normal. Employment gains averaged about 

200 thousand over the first half of 2013, up 

from 180 thousand in the previous six 

months. The unemployment rate continued to fall from its October 2009 peak of 10 percent to 

7.6 percent in June 2013, although much of the improvement reflects lower labor force 

participation. The drop in participation can be partly explained by demographic and other longterm trends, but cyclical factors have also played a role, with the share of discouraged workers 

significantly above pre-recession levels at 2.7 percent of the working age population. 

Meanwhile, long-term unemployment remains close to 40 percent of total unemployment, 

about twice the level before the crisis. 

50

75

100

125

150

350

450

550

650

750

1953 1965 1977 1989 2001 2013

Household Net Worth

20 yr. Moving Average of Net Worth

Liabilities (RHS)

Sources: Federal Reserve Board; BEA; IMF staff calculations.

Household Net Wealth 

(Percent of personal disposable income)
UNITED STATES

INTERNATIONAL MONETARY FUND 5

2. The pace of fiscal consolidation has accelerated in 2013. While policymakers successfully 

avoided the large “fiscal cliff” in January 2013, 

Congress allowed the automatic across-theboard spending cuts (“sequester”) to materialize 

from March. In combination with other measures, 

such as higher marginal rates for upper-income 

taxpayers and the expiration of the payroll tax 

cut, as well as stronger-than-expected revenue 

collections, the structural primary withdrawal is 

estimated to have increased to about 21⁄2 percent 

of GDP this year, from 11⁄4 percent in 2012 

(Chart). 

3. The Fed continued to use innovative tools to further ease the monetary policy stance. 

 After the expiration of “Operation Twist” in December 2012, the Fed announced open-ended 

outright purchases of long-term Treasuries at an initial pace of $45 billion a month. These 

purchases were in addition to open-ended purchases of mortgage backed securities (MBS) at a 

pace of $40 billion a month, which began in September 2012. 

 At the December 2012 meeting of the Federal Open Market Committee (FOMC), the Fed also 

switched from a date- to a threshold-based forward guidance for the policy rate. Specifically, the 

Fed committed to keeping the federal funds rate close to zero at least as long as the 

unemployment rate remains above 61⁄2 percent, inflation projected 1–2 years ahead is not above 

21⁄2 percent, and longer-term inflation expectations remain well-anchored. The highly 

accommodative monetary policy stance has provided key support to the recovery. Based on 

staff estimates, the lower long-term yields from unconventional policies resulted in a stimulus 

equivalent to a federal funds rate easing (in a setting unconstrained by the zero bound) of 

roughly 250 basis points as of end-2012. 

4. With the economic recovery gradually proceeding, the Fed has recently indicated that, 

based on its current outlook, its asset purchases 

could be scaled back later this year. In its March 

2013 statement, the FOMC indicated that the pace 

and composition of purchases would be adjusted 

not only depending on further progress in the labor 

market and inflation developments, but also on the 

basis of the likely benefits and costs of such 

purchases—the latter including potential financial 

stability consequences. Subsequent Fed 

commentary—including the Chairman’s testimony 

to the Joint Economic Committee of the U.S. 

Congress on May 22—discussed the potential to 

taper asset purchases pending continued improvement in the economy. After the June 2013 FOMC 

-3

-2

-1

0

1

2

3

4

5

2009 2010 2011 2012 2013

Sources: Congressional Budget Office; BEA; IMF staff estimates.

Change in Primary Structural Deficit

(General government, GFSM2001 basis; percent of GDP)

0.0

0.5

1.0

1.5

2.0

2013 2014 2015

Forward guidance (December 2012)

Before Congressional Testimony (May 2013)

After FOMC (June 2013)

After Congressional Testimony (May 2013)

Juy 5, 2013

Before FOMC

2016

Expected Path of Federal Funds Rate

(From futures contracts, in percent)

Source: Bloomberg L.P.

Expected first rate 

increase 
UNITED STATES

6 INTERNATIONAL MONETARY FUND

meeting, the Fed noted that if the recent gains in labor market were to continue and the economy 

were to pick up in the next quarters, then it would be appropriate to begin scaling back asset 

purchases later in 2013 and end them in the middle of 2014. It also noted that such actions would 

amount to slowing the pace of further accommodation, rather than tightening the monetary policy 

stance. Financial markets have reacted by moving forward their expectations about the start of the 

tightening cycle (Chart). As of early July 2013, market expectations are for the tapering of the Large 

Scale Asset Purchase (LSAP) program to begin sometime before year-end, and for the first policy 

rate increase to occur in late 2014, while the large majority of FOMC members expect such increase 

to occur during 2015. 

5. Despite tightening somewhat recently, 

financial conditions remain accommodative. As of 

early July 2013, stock prices were up over 14 percent 

since end-2012. Risk spreads have narrowed through 

mid-May, as markets became more optimistic about 

growth prospects and global policy actions removed 

key tail risks. Bank lending attitudes have continued to 

ease in all market segments, although credit 

conditions remained relatively tight for mortgages 

and, to a smaller extent, small and medium enterprises 

(SMEs) (see Selected Issues Chapter 4). Financial 

conditions have tightened since May after investors 

started pricing in an earlier tightening of monetary 

policy. As of early July, long-term Treasury yields had 

risen about 100 bps from their trough in May (Chart), 

with emerging market currencies, stock markets, and 

bond markets experiencing a sizable correction. Still, 

financial conditions in the United States remain looser 

than 12 months ago (Chart). 

6. Favorable financial conditions and stronger 

balance sheets helped private domestic demand 

weather both the fiscal-cliff related uncertainty 

in late 2012 and the fiscal adjustment so far in 

2013. Despite the expiration of the payroll tax cut 

and other fiscal policy measures, private 

consumption expenditure (PCE) continued to grow 

in the first 5 months of 2013 at about the same pace 

as in 2012 (1.8 percent, from 1.9 percent during 

2012), supported by lower gasoline prices, higher 

payrolls, and rising net worth (Chart). In particular, 

staff estimates that the 25 percentage points 

increase in the household net worth-to-income ratio 

400

450

500

550

600

650

700

750

-8

-6

-4

-2

0

2

4

6

8

10

06Q2 07Q2 08Q2 09Q2 10Q2 11Q2 12Q2

PCE growth (SAAR)

Personal Savings Rate

Household net worth (RHS)

Sources: BEA; Haver Analytics; IMF staff estimates.

Personal Consumption Expenditures, 

Savings, and Net Worth

(Percent of disposable income)

13Q1

99.0

99.2

99.4

99.6

99.8

100.0

100.2

100.4

100.6

Jul.10 Mar.11 Nov.11 Jul.12 Mar.13

Financial Conditions Index 1/

Sources: Goldman Sachs; Bloomberg L.P.

1/ The index is set to 100 for the average since 2000.

Tighter

Jul.13

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

Jul.09 Jan.10 Jul.10 Jan.11 Jul.11 Jan.12 Jul.12 Jan.13 Jul.13

10-year Treasury Note

30-year Treasury Bond

30-year Fixed-Rate Mortgage

Long-Term Interest Rates

(Percent)

Sources: Bloomberg L.P; Haver Analytics.
UNITED STATES

INTERNATIONAL MONETARY FUND 7

in 2013:Q1 (vis-à-vis 2012:Q4) accounts for about a half of the 2.6 percent increase in PCE growth 

(SAAR) in 2013:Q1. Helped by elevated corporate profitability, business fixed investment (particularly 

in equipment and software) continued to grow solidly in 2012, but slowed somewhat in 2013. 

7. Inflation has declined sharply in 2013, although expectations remain well anchored 

around the Fed’s target. Headline (12-month) CPI inflation slowed to 1.4 percent (year on year) 

through May 2013, and core CPI has decelerated to 1.7 percent, from 2.3 percent in May 2012. The 

core PCE price index—the Fed’s preferred measure of underlying inflation—increased only 

1.1 percent (year on year) in April 2013, a historical low and well below the Fed’s 2 percent target for 

longer-run inflation. While to a certain extent the recent deceleration in inflation reflects transitory 

factors, including the impact of the sequester 

on health care inflation (which has a much 

larger weight in the PCE index than in the CPI), 

the still sizeable degree of slack in goods and 

labor markets (with the output gap estimated 

at about 4 percent as of mid-2013), decreasing 

gasoline prices, and subdued non-petroleum 

import prices all contributed to softer inflation 

dynamics. Despite low underlying inflation 

pressure, market measures of long-run 

inflation expectations have remained broadly 

stable at between 2 and 3 percent (year on 

year) (Chart). 

8. Despite a weak external environment, the external trade deficit contracted, reflecting 

in particular continuing increases in domestic oil and natural gas production. The non-oil trade 

deficit was little changed in 2012 relative to the year before (at about 2.9 percent of GDP), with 

slower growth of both imports and exports—the latter reflecting weaker growth in a number of 

major trading partners. By contrast, the oil trade deficit decreased to 1.9 percent of GDP in 2012 

from 2.2 percent in 2011, in part due to the sharp increase in the domestic production of oil and gas 

extracted through non-conventional techniques. The current account deficit declined to 2.8 percent 

of GDP in 2012 (from 3 percent of GDP in 2011). While the net international investment position 

(NIIP) deteriorated to about 25 percent of GDP, the investment income balance remained positive 

during 2012, at around 11⁄2 percent of GDP. 

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2008 2009 2010 2011 2012 2013

TIPS 5 yr. forward breakeven

University of Michigan, 5 yr. inflation 

expectations

Survey of Professional Forecasters (CPI)

Long-term Inflation Expectations

(Percent)

Sources: Federal Reserve Bank of Philadelphia; University of Michigan; Haver Analytics; 

Bloomberg L.P.
UNITED STATES

8 INTERNATIONAL MONETARY FUND

OUTLOOK AND RISKS 

9. Growth is expected to remain slow in 2013, before accelerating in 2014. After the 

policy-induced soft patch in the first half of this year, activity should gradually pick up in the second 

half, with annual average growth for 2013 projected at 1.7 percent, accelerating to 2.7 percent in 

2014. The unemployment rate is projected to remain broadly stable during 2013, but to post more 

significant decreases in 2014. As the transitory factors that have contributed to lower inflation over 

the past year dissipate, inflation is expected to regain some momentum but to remain subdued 

given the still wide output gap, with the PCE index below the Fed’s longer-run 2 percent objective 

over the next two years. This central scenario rests on the following main assumptions: 

 Fiscal policy will be a significant drag on growth in 2013, but less so in 2014. The general 

government is projected to subtract between 11⁄2 and 13⁄4 pp from growth this year, in part due 

to the continuing implementation of automatic spending cuts and tax increases. The debt 

ceiling, which will likely become binding again in the fall, is assumed to be raised without any 

disruption to the U.S. and the global economy. 

 Monetary policy will remain accommodative. Purchases of long-term Treasury bonds and agency 

MBS are projected to continue at the current pace through late this year, and then to be scaled 

back gradually over the course of 2014. Policy rates are assumed to remain near zero until early 

2016, consistent with staff’s macroeconomic forecast. The term premium embedded in longterm Treasury rates is assumed to increase gradually, responding in an orderly fashion to the 

Fed’s announcements about the evolution of its asset purchases, contributing to higher longterm yields. 

 Private domestic demand will continue its recovery from the depth of the Great Recession. Despite 

the recent tightening, credit conditions are expected to remain accommodative, as the U.S. 

banking sector is generally well capitalized and highly liquid and financing conditions in 

securities markets continue to be favorable. Residential investment should continue its recovery 

toward levels consistent with trend household 

formation, although the housing recovery is 

expected to proceed only gradually (with 

housing starts back to pre-crisis average levels 

in 2017), as access to mortgage credit remains 

relatively tight for many households. 

Consumption growth is expected to remain 

resilient in 2013, as stronger balance sheets 

broadly offset the impact of higher payroll and 

income taxes, and to strengthen next year 

reflecting more robust disposable income 

growth and improved labor market conditions 

(Chart). 

-6

-4

-2

0

2

4

6

12Q1 12Q4 13Q3 14Q2

General Government C&I

Change in Inventories

Residential Investment

Net Exports

Private Nonresidential Fixed Investment

Personal Consumption Expenditures

Real GDP Growth

Private Final Domestic Demand

Contributions to Growth

(Percentage points, SAAR)

Sources: BEA; IMF staff calculations.

14Q4
UNITED STATES

INTERNATIONAL MONETARY FUND 9

 Export growth is projected to remain subdued during 2013 but to pick up somewhat thereafter, in 

line with the gradual recovery of global demand projected in the July 2013 World Economic 

Outlook (WEO). 

10. Risks to the outlook are still tilted to the downside, although less so than last year (see 

the Risk Assessment Matrix in Annex I). Among downside risks are the following: 

 Private domestic demand could lose some of its recent momentum. In particular, the drag 

from fiscal policy could turn out to be greater than expected in our baseline scenario, especially 

if the sequester and higher payroll taxes were to have a stronger-than-expected effect on 

consumption. Also, lower increases in house prices amid tight mortgage conditions could slow 

household deleveraging and delay its positive spillovers to consumption, particularly if the 

recent increase in mortgage rates were to continue. A failure to raise the debt ceiling in a timely 

fashion would have severe domestic and global repercussions, although the threat of 

exceptionally high costs limits the risk of policy slippage in this area. 

 A worsening of the euro area debt crisis would weigh on U.S. growth. Investor concerns 

about adjustment fatigue, political uncertainty, and insufficient euro area-wide backstops can 

cause financial stress to reemerge in the euro area periphery. In such a scenario, the U.S. would 

be affected through both trade and financial channels, including higher risk aversion and a 

stronger U.S. dollar amid safe-haven capital inflows—staff estimates that a 300 bps increase in 

the euro area periphery spreads would reduce U.S. output by about 3⁄4 pp during the first year. 

The April 2013 WEO has also considered a more benign scenario in which the euro area escapes 

the worst of the crisis, but remains stuck in a low growth environment. The spillovers to the 

United States would be more limited in this case, with U.S. output lower by about 1⁄4 percent 

after two years. 

11. The recovery could also be hurt by a faster-than-projected increase in interest rates—

which would also pose risks to global growth. While it is difficult to see expectations of future 

policy rates being revised durably upward in the absence of a faster recovery, there are a few 

scenarios where long-term rates could potentially increase more than currently anticipated without 

a stronger recovery. 

 Initial steps taken by the Fed to normalize monetary policy conditions could result in an abrupt 

increase in the term premium, should investors rush to offload their Treasury holdings to avoid 

greater capital losses down the road. The increase in market turbulence since late May is 

illustrative in this regard. The term premium can experience a sharp increase from staff’s 

baseline path in the presence of higher uncertainty over the monetary policy stance and 

elevated financial market volatility (Selected Issues Chapter 5). Staff simulations using the IMF 

Global Integrated Monetary and Fiscal (GIMF) model suggest that a 50 bps term premium shock 

could lead to an output loss of between 1⁄4 and 1⁄2 percent in the United States over two years 

depending on its persistence. The international spillovers could be substantial if the spike in 

rates were to lead to renewed concerns about global growth, higher global risk aversion, and a 
UNITED STATES

10 INTERNATIONAL MONETARY FUND

sudden reversal of capital flows to emerging markets, and higher volatility in global financial 

markets. 

 Increased signs of financial market exuberance could also induce a faster normalization of 

interest rates than currently projected. There are a few signs that the protracted period of low 

interest rates may have led to a weakening in underwriting standards and a rise in balance sheet 

leverage, particularly in the corporate credit sector, as well as increased duration, credit, and 

liquidity risks in an effort to compensate for diminished returns in the current environment (see 

the April 2013 Global Financial Stability Report). To the extent these risks become less 

manageable, or unable to be contained through tighter regulation or macroprudential policies, 

the Fed might need to reassess the benefits derived from its LSAP program, potentially curtailing 

or ceasing asset purchases sooner than anticipated. 

 A pick-up in inflation expectations could push long term interest rates higher and/or force the 

Fed to respond by bringing forward the tightening cycle. With inflation expectations continuing 

to be well anchored, however, the probability of an inflation scare in the near term appears quite 

low, and may be considered more as a medium-term risk (especially if potential output turned 

out to be much lower than estimated). The April 2013 WEO considers a scenario where inflation 

pressures start to build in 2014 as U.S. excess capacity is lower than in the baseline. With the Fed 

beginning to tighten in 2014, GDP growth in 2016 would be about 2 percentage points lower 

than in staff’s baseline. 

 Over the medium term, lack of further progress on fiscal consolidation could lead to higher 

sovereign risk premia. Based on the April 2013 WEO, a 200 bps increase in the sovereign risk 

premium would subtract between 11⁄2 and 21⁄2 pp from GDP growth over two years. As 

emphasized in the 2013 Spillover Report, such developments would have severe repercussions 

on global financial markets, and could lower global growth almost by a similar amount. 

12. There are also upside risks to staff’s baseline scenario. A faster housing market recovery 

may jumpstart a virtuous cycle of easier financial conditions, stronger investment, higher wealth 

accumulation and consumer demand. In particular, easier mortgage conditions could unleash pentup demand for housing from new households. In 

the staff’s baseline, household formation is expected 

to gradually return to its trend after the sharp fall 

observed during the crisis (Chart). But after being 

several years well below trend, household formation 

could well ‘overshoot’ its steady-state level, bringing 

housing demand and construction activity 

temporarily above their long-run level. The impact 

on residential investment would likely depend on 

whether new households buy or rent, given the 

lower cost of multifamily housing units that cater to 

the rental market relative to single family homes. 

Staff estimates that a 5 percentage point increase in housing starts would add 0.3 percent to output 

0

500

1,000

1,500

2,000

2,500

3,000

2000 2006 2012 2018

Household Formation

Housing Starts

Sources: U.S. Census Bureau; Haver Analytics; IMF staff estimates.

Household Formation and Housing Starts

(Thousands of units)
UNITED STATES

INTERNATIONAL MONETARY FUND 11

over two years. Also, lower uncertainty and prospects for a faster recovery of consumer demand 

could induce businesses to shift more aggressively from cash hoarding towards real investment. In 

the medium term, advances in the extraction of oil and gas from unconventional sources could 

boost growth more than anticipated, especially if lower domestic energy prices were to significantly 

boost the competitiveness of U.S. manufacturing (Box 2 and Selected Issues Chapter II). 

POLICY DISCUSSIONS 

Discussions focused on policies to support the recovery, reduce emerging vulnerabilities, and 

address key medium-term challenges. In particular, the discussion centered on the appropriate 

pace, timing, and composition of fiscal consolidation; the appropriate monetary policy stance, side 

effects of unconventional monetary policies, and challenges related to the monetary policy exit; the 

merit of additional measures to unclog the housing markets and reduce the risks from persistently 

high long-term unemployment; the progress made in the reform of financial regulation, as well as 

issues related to the international coordination of regulatory reforms.

A. Outlook 

13. Staff and the authorities broadly concurred 

on their views about the economic outlook, with 

some differences in particular on medium-term 

forecasts for long-term U.S. Treasury bond yields.

The authorities’ projections (as reflected in the FY2014 

federal budget proposal) assume that GDP growth 

will reach 2.3 percent this year, somewhat above the 

1.7 percent projected by staff, in part due to different 

assumptions regarding fiscal withdrawal but also the 

recent downward revision of GDP growth in 2013:Q1, 

which is reflected only in staff’s forecast. Both staff 

and authorities expect growth to pick up from 2014, 

and views on the medium term have greatly 

converged since the last Article IV (Chart). That said, 

notable differences remain in terms of the interest 

rate forecast, with staff expecting the 10-year 

Treasury rate to increase to about 53⁄4 percent in the 

medium term (about 1 pp above the authorities’ 

forecasts), as policy interest rates gradually return to 

more neutral levels and Treasury yields (so far 

compressed by strong safe haven flows and Fed 

purchases) price a modest penalty for the much 

higher stock of public debt (Chart). While 

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2012 2013 2014 2015 2016 2017 2018

GDP Growth Projections

(Percent, yoy)

2012 Article IV

Budget FY13

2013 Article IV

Budget FY14

Sources: OMB; Haver Analytics; IMF staff estimates.

0

1

2

3

4

5

6

7

2006 2008 2010 2012 2014 2016 2018

IMF

CBO

OMB

Consensus as of April 2013

Blue Chip Consensus as of July 2013

Comparison of 10-Year Treasury Yields

(Percent)

Sources: OMB; CBO; Blue Chip Consensus; Haver Analytics; IMF staff estimates.
UNITED STATES

12 INTERNATIONAL MONETARY FUND

acknowledging significant uncertainty in projecting medium-term interest rates, the authorities 

argued that there is no evidence of a “debt penalty” in current market rates, and over the medium 

term the Administration’s budget plan would place the debt ratio on a downward path anyway. 

B. Fiscal Policy 

14. There was broad consensus between the authorities and staff that the pace of fiscal 

consolidation was too fast this year. Staff noted that its projected 21⁄2 percent of GDP reduction of 

the general government structural primary deficit is too high given the fragile recovery and limited 

room for monetary policy offset; a deficit reduction of some 1 percentage point of GDP would have 

been more appropriate. The authorities noted that the Administration’s budget proposal was 

consistent with the staff’s recommendation, but 

the rapid fiscal withdrawal resulted from a 

political gridlock in Congress which led to 

implementation of the sequester, while not 

allowing passage of the Administration’s plans 

for additional infrastructure spending and other 

support measures. Expiration of the payroll tax 

cut was necessary to ensure that the temporary 

tax cut would not become entrenched through 

repeated extensions by Congress. Unexpected 

revenue strength also played a significant role in 

raising the pace of fiscal consolidation (Chart).1

15. The authorities felt that the main short-term priority is to replace the sequester with a 

back-loaded set of revenue-raising and targeted expenditure-saving policies, although 

prospects for Congressional action remain unclear. Staff agreed, noting that the indiscriminate 

expenditure cuts not only exert a heavy toll on growth in the short term (reducing this year’s growth 

by some 1⁄2 percentage points of GDP), but could also reduce medium-term potential growth by 

reducing infrastructure, science, and education spending. Moreover, the reduction falls heavily on 

discretionary spending while failing to address entitlement programs, the key drivers of deficits over 

the longer term. The authorities broadly concurred with this assessment and clarified that from 

FY2014 onward, the cuts required by the sequester—if still in place—would be implemented 

through caps on aggregate spending, thus providing some flexibility to reallocate funds and protect 

priority expenditures. Staff agreed with the authorities that measures to boost infrastructure 

investment, adopt training programs targeted at long-term unemployed, and support the housing 

market recovery remain desirable at this stage of the economic cycle. 

 

1

 Some of the strength was likely due to cyclical and one-off factors such as shifting of tax payments in anticipation 

of higher marginal tax rates from January 2013. 

0.0

0.5

1.0

1.5

2.0

2.5

Sequester

Expiration of 

Payroll Tax Cut

Tax Increases 1/

Revenue Surprise

Other 2/

Composition of Fiscal Withdrawal in 2013

(General government, calendar year, percent of GDP)

Sources: Congressional Budget Office; IMF staff estimates.

1/ Expiration of 2001, 2003, 2009 tax cuts for upper-income taxpayers (incl. interaction with Alternative 

Minimum Tax) and health care reform taxes.

2/ Includes war drawdown and removal of emergency funds for disaster relief.
UNITED STATES

INTERNATIONAL MONETARY FUND 13

16. Staff expressed concerns that, despite the substantial deficit reduction in recent years, 

the U.S. fiscal position remains unsustainable over the long term. The general government 

deficit has more than halved from over 13 percent of GDP in 2009 to a projected 5.9 percent of GDP 

in 2013. In the staff’s baseline scenario, the budget deficit will continue to shrink over the next few 

years due to a cyclical rebound in revenues, savings from legislated measures, and lower defense 

spending. Gross general government debt would peak at around 110 percent of GDP and start 

declining in 2015, also thanks to the favorable interest rate-growth differential reflecting still-low 

interest rates and a pickup in the pace of recovery. However, staff projects that the impact of 

population aging and health care costs on spending and the gradual normalization of interest rates 

would cause the budget deficit to widen and put the ratio of public debt to GDP again on an 

upward path—and from a relatively high starting point (Panel Figure 5). In particular, absent 

additional reforms, spending on major federal health care programs and Social Security is expected 

to increase by about 2 percentage points over the next decade, while higher interest rates would 

increase net interest outlays almost by another 2 percentage points over the same period. Staff 

suggested that placing the debt ratio firmly on a downward path would require a general 

government structural primary surplus of about 1 percent of GDP—implying an additional mediumterm fiscal adjustment of about 2 percentage points of GDP, as the staff’s current projections point 

to a general government primary deficit of 1 percent of GDP in 2022 (Table).

2012 2013 2014 2022 2023

IMF staff baseline projection 1/

Federal budget balance 2/ -6.9 -4.6 -3.4 -3.8 -3.7

Federal budget structural primary balance 2/ 3/ -4.2 -1.9 -0.9 -0.4 -0.1

Federal debt held by public 72.6 75.6 76.6 75.8 76.5

General government budget balance 2/ 4/ -8.5 -5.9 -4.8 -4.8 ---

General government structural primary balance 3/ 4/ -4.4 -1.9 -1.2 -0.9 ---

General government debt 4/ 106.4 108.9 109.8 109.0 ---

IMF staff recommended trajectory for reducing the public debt ratio 5/

Federal budget balance 2/ -6.9 -4.8 -3.9 -1.6 -1.6

Federal budget structural primary balance 2/ 3/ -4.2 -2.1 -1.5 1.6 1.7

Federal debt held by public 72.6 75.7 77.0 69.1 68.0

General government budget balance 2/ 4/ -8.5 -6.2 -5.4 -2.6 ---

General government structural primary balance 3/ 4/ -4.4 -2.2 -2.0 1.0 ---

General government debt 4/ 106.4 109.2 110.3 102.0 ---

Memorandum items

Federal budget balance (authorities) 6/ -7.0 -6.0 -4.4 -2.1 -1.7

Sources: Office of Management and Budget, Congressional Budget Office, and IMF staff estimates.

1/ Projections using the IMF macroeconomic and policy assumptions.

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

6/ Administration's FY2014 budget proposal.

U.S. Government Finances

(In percent of GDP)

5/ Assumes a back-loaded gradual increase in the structural primary balance until a primary surplus of 1 percent of 

GDP for general government is reached in 2022. 

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

nominal GDP.

2/ Includes staff's adjustments for one-off items, including the cost of financial sector support. Excludes the portion 

of payments from the GSEs related to certain accounting changes.
UNITED STATES

14 INTERNATIONAL MONETARY FUND

17. The authorities recognized the existence of long-term fiscal challenges but argued 

that a smaller fiscal adjustment would be needed. They underscored their commitment to place 

the debt-to-GDP ratio on a downward path, and highlighted that the latest budget proposal 

identifies measures to move the federal government primary deficit into a surplus of over 1 percent 

of GDP in FY2023. This would be sufficient to place the federal debt to GDP ratio on a downward 

path under the authorities’ macroeconomic assumptions (which, as noted earlier, feature lower 

interest rates on Treasury bonds relative to staff’s assumptions). 

18. Staff stressed that adopting a medium-term fiscal plan while slowing the pace of 

short-run fiscal adjustment would also help sustain global growth and favor the rebalancing 

of global demand and the reduction of global imbalances over the medium term—together 

with efforts to increase domestic demand in surplus countries, as highlighted in the G-20 Mutual 

Assessment Process. Less fiscal withdrawal in the short run would allow for a more balanced policy 

mix by partly relieving monetary policy of its burden of supporting the recovery. In turn, this would 

support U.S. growth and generate more favorable outward spillovers while reducing the risks to U.S. 

and global financial stability from a prolonged period of low interest rates. It would also help 

contain the risk of a future disruptive rise in long-term interest rates on U.S. Treasuries, which would 

have severe domestic and global repercussions. The authorities broadly concurred with these views. 

19. Staff and authorities agreed that a medium-term fiscal consolidation plan should 

entail both lower growth in entitlement spending and higher revenues.

2

 In staff’s view, new 

revenues could be raised through a fundamental tax reform which would simplify the tax code and 

broaden the tax base through a reduction in exemptions and deductions, as well as through the 

introduction of a value added tax (VAT) and a carbon tax (Table). The authorities noted that their 

attention focused on broadening the tax base, and there were no plans for proposing a carbon tax 

or VAT. There was agreement that spending measures would be needed to curb the growth in 

public health care and pension outlays. Authorities noted that some measures along these lines, 

including health care savings and the re-indexation of public pensions to the chained CPI, are 

proposed in the Administration’s budget for FY2014, but staff underscored that additional action 

would be needed to contain the steady growth in mandatory spending as a share of the economy. 

In staff’s view, early legislative action is important in order to generate meaningful savings in 

entitlement spending during the next decade, given the very gradual pace at which such savings 

accrue. The authorities acknowledged the need for further measures to deal with long-run budget 

challenges, but noted that, with much progress already achieved in deficit reduction, their adoption 

did not need to be rushed. They also noted that, given the still substantial differences in views in 

Congress on the appropriate fiscal consolidation strategy, they would likely be adopted gradually as 

the political consensus builds on various policies. 

 

2

 The 2011 Selected Issues Paper discusses possible institutional arrangements for this framework (IMF Country 

Report No. 11/202). 
UNITED STATES

INTERNATIONAL MONETARY FUND 15

20. Staff discussed with the authorities the outlook for health care spending—the key 

driver of long-term budget deficits. The implementation of the Affordable Care Act (ACA) is 

proceeding, but the law has faced implementation challenges in light of its sheer complexity as 

well as last year’s Supreme Court ruling which made the Medicaid expansion optional for the 

states. The authorities pointed to early evidence from several states suggesting that the insurance 

premia offered to individuals through online insurance exchanges are going to be substantially 

lower than initially projected, highlighting the potential benefits of greater transparency and 

competitive pressures in curbing health care costs. 

Staff urged the authorities to fully implement the 

ACA, which provides other possible tools for cost 

control (e.g., experiments with alternative 

payment and delivery methods at the Innovation 

Center of the Center for Medicare and Medicaid 

Services). The recent slowdown in health care 

expenditure growth (Selected Issues Chapter 3) 

has led both the authorities’ and staff to revise 

down health spending projections (Chart), but 

both sets of projections still envisage continued 

growth of health care spending in percent of GDP 

5.0

5.5

6.0

6.5

7.0

7.5

8.0

2012 2015 2018 2021

Aug-10

Aug-11

Aug-12

Feb-13

May-13

Projections of Federal Spending on Major 

Health Care Programs

(Percent of GDP)

Sources: Congressional Budget Office; IMF staff calculations.

Category Detailed budget option FY2023

Revenue

VAT Impose a 5 percent VAT (Wide base/narrow base) 1.4/0.8

Carbon tax Impose a carbon tax 0.6

Personal income Cap itemized deductions at 15 percent of income 0.6

tax 2/ Slowly reduce mortgage interest deduction 0.3

Replace health-care tax exclusion with a more limited tax deduction 0.4

Spending

Health care Increase premia for Medicare Part B, reform cost-sharing 0.2

Require vendors to pay drug rebates, limit torts 0.1

Modify the excise tax on high-cost health care plans 0.2

Reform TRICARE 0.1

Total health care 0.6

Social Security Base social security COLA on chained CPI-U 0.1

Progressive price indexing for initial benefits 0.1

Gradually raise the earliest and full eligibility age 0.3

Increase maximum taxable earnings for Social Security 0.3

Total Social Security 0.7

2/ Certain personal tax expenditure options are not additive.

1/ These policy options are some of the measures available to design a comprehensive fiscal consolidation plan. 

Policymakers can choose from this menu of options to achieve a particular level of adjustment. 

in percent of GDP

Annual savings

United States: Illustrative Fiscal Policy Options 1/

Sources: CBO; National Fiscal Commission; and IMF staff estimates.
UNITED STATES

16 INTERNATIONAL MONETARY FUND

over the long term, primarily owing to population 

aging (Chart). Hence, consideration could be given 

to additional measures such as cutting healthrelated tax expenditures (amounting to some 

11⁄4 percent of GDP annually) and imposing greater 

cost sharing on the beneficiaries. 

21. The fiscal drag from state and local 

governments is gradually subsiding, but both 

staff and the authorities recognized that these 

governments continue to face medium-term 

risks from underfunded entitlements. Balanced 

budget rules have kept the consolidated state and local deficit at around 1 percent of GDP, with the 

debt ratio under 25 percent of GDP. Borrowing conditions for state and local issuers have remained 

broadly stable, despite sizeable medium-term risks from pension underfunding (estimated in a wide 

range of $1–4 trillion) and health care costs, and recent high-profile cases of municipal financial 

distress. Historically, municipal bankruptcies have been rare, with defaults characterized by high 

recovery rates for investors. Staff stressed that given rapidly rising revenues, it is now time to rebuild 

buffers while making further progress on reducing unfunded liabilities, especially from the pension 

systems. The authorities expressed optimism that last year’s decision by the Governmental 

Accounting Standards Board (GASB) to require the use of riskless discount rate for unfunded 

pension liabilities could further incentivize state and local governments to address the problem, by 

providing a more accurate estimate of the size of the unfunded liabilities. The state and local 

budgetary frameworks could also be enhanced and made less pro-cyclical.3

C. Monetary Policy 

22. While the highly accommodative monetary policy stance continues to provide 

essential support to the economic recovery, staff emphasized the need to carefully assess its 

financial stability implications. The changes in the size and composition of the Federal Reserve’s 

balance sheet—together with forward guidance—have helped to overcome the challenges to 

monetary policy arising from the zero lower bound. While the macroeconomic benefits of asset 

purchases continue to outweigh the costs, staff expressed concerns that a long period of 

exceptionally low interest rates may entail potential unintended consequences for domestic financial 

stability, such as by spurring financial market froth, and complicate the macro-policy environment in 

some emerging markets. However, staff and the authorities agreed that a premature withdrawal of 

monetary stimulus to address these risks could slow the recovery and eventually prolong the period 

 

3

 See Chapter VII of IMF Country Report 11/202. The state and local governments should start making actuariallysound contributions to their entitlement systems, continue their push toward more risk sharing, streamline benefits 

when warranted, and avoid bets for resurrection through high risk/high return strategies. Rainy day funds could be 

allowed to accumulate beyond the prerecession levels to limit pro-cyclicality and consideration could be given to 

saving revenue over-performance from highly cyclical revenues such as capital gains taxes. 

0

4

8

12

16

20

2011 2015 2019 2023 2027 2031 2035

In the Absence of Aging 

and Excess Health Care Cost Growth

Effect of Aging

Estimate of Federal Spending on Major 

Mandatory Health Care Programs and Social 

Security 2011–35

(Percent of GDP)

Source: Congressional Budget Office. 

Effect of Excess Health 

Care Costs Growth
UNITED STATES

INTERNATIONAL MONETARY FUND 17

of low rates, thus exacerbating financial stability risks. The authorities noted that they had enhanced 

their monitoring of such risks, and that they may consider making more use of macroprudential 

measures to address them if they were to become more tangible. 

23. The exit from unconventional monetary accommodation is likely to entail a number of 

challenges. 

 Potential for abrupt, sustained moves in long-term interest rates and financial market volatility. 

Staff emphasized that expectations of a tapering or end of the Fed’s asset purchases could 

trigger a sharper-than-expected sell-off of fixed-income assets, as investors seek to avoid larger 

capital losses in the future (Selected Issues Chapter 5), with repercussions for global capital 

flows, emerging market currencies, and asset markets. While effective forward guidance can give 

the market some time to adjust, a smooth and gradual upward shift in the yield curve might be 

difficult to engineer, and there could be periods of higher volatility when longer yields jump 

sharply—as recent events suggest. The authorities acknowledged these challenges, but also 

argued that, compared to the past, the toolkit at their disposal is broader and their 

communication policy is better able to respond to unexpectedly large increases in long-term 

rates. The authorities also stressed that the macro conditions underpinning a potential rise in 

long-term rates are an important consideration. For instance, higher interest rates owing to a 

rise in inflation premia would be an adverse outcome, but they agreed with staff that this is a 

low-risk scenario at this juncture given that inflation expectations are well-anchored and recent 

data point to subdued price pressures. By contrast, if the rise in long-term rates occurs in the 

context of a recovery in domestic demand, then the risk of adverse spillovers would be expected 

to be lower. Further, the authorities expressed some skepticism about long-lasting negative 

effects of a rise in U.S long-term rates on emerging markets, given the rise in structurallyoriented capital inflows to these economies as well as their improved domestic fundamentals. 

 Managing short-term rates. Until excess reserves are substantially reduced, the Fed’s ability to 

target the federal funds rate may be impaired. The Fed’s main operational rate at present is the 

Interest on Excess Reserves (IOER). But its transmission to other market rates is less certain, 

owing to the large volume of excess reserves and the segmented nature of U.S. money markets 

(some cash-rich institutions, like the Government-Sponsored Enterprises (GSEs), do not have 

access to interest-earning facilities at the Fed). This notwithstanding, the authorities were 

confident that increasing the IOER, combined with draining excess reserves, would be sufficient 

to drive up short-term interest rates. They stressed the range of tools available, including term 

deposits and reverse repos (with an extended set of counterparties), should enable a large 

volume of reserves to be drained. Staff noted that using the IOER also raises a governance issue, 

since its level is decided by the Federal Reserve Board, rather than the FOMC, but the authorities 

stressed the intention to closely coordinate policies. 

 Losses to the Fed. As the interest on excess reserves rises with policy tightening, the Fed would 

incur larger costs on its liabilities but there will be no change in the coupons on its securities 

portfolio—increasing the potential for negative cash flow (losses) to appear on the balance 

sheet. Furthermore, rising long-term interest rates would reduce the value of long-term 
UNITED STATES

18 INTERNATIONAL MONETARY FUND

securities held in the Fed portfolio. While any losses should be judged in the context of the 

extraordinary profits which have accrued and been remitted to Treasury over the past few years, 

it is quite conceivable that losses could give rise to political pressure. The authorities were 

conscious that reduced remittances in the future may lead to some political backlash, and said 

they were seeking to be transparent and clear about the longer-term evolution of the Fed 

balance sheet to forestall future concerns. 

24. The authorities underscored that their approach to exit from QE would not be a 

predetermined, mechanical process and that communication would play a key role. Instead, 

they expect to carefully assess the economic outlook and adjust the pace and composition of 

purchases over time accordingly. Both staff and the authorities agreed that effective communication 

will be critical. In the event that domestic conditions deteriorate or global financial turmoil 

intensifies, staff suggested that the Fed could provide further stimulus by adjusting the asset 

purchase program. The authorities agreed, noting that if the recovery were to slow, or the inflation 

outlook were to prove more subdued than currently expected, the Fed could extend asset 

purchases, while if the economic recovery were to accelerate, the pace of purchases could be 

trimmed more quickly. The authorities emphasized that reducing the pace of purchases implied a 

slower pace of adding monetary accommodation, and not a withdrawal of accommodation. They 

continued to expect a considerable period to elapse between the end of asset purchases and the 

first increase in the federal funds rate. The threshold-based forward guidance would continue to 

inform the FOMC’s decision on the timing of that increase. They viewed the increase in long-run 

yields from their lows in May 2013 as a reflection of increased optimism on the economic recovery, 

realignment in markets participants’ views regarding the Fed’s reaction function, and the effects of 

market dynamics as investors adjusted their portfolios in light of these developments. 

D. Housing Policy 

25. The authorities noted that policies to support the housing market have contributed to 

the recent recovery. Accommodative monetary policy, including purchases of MBS, has set the 

stage for a revival of the housing market by 

lowering MBS yields and, in turn, mortgage rates. 

Mortgage finance policies (such as the Home 

Affordable Refinance Program (HARP) and the 

Home Affordable Modification Program (HAMP), 

both of which have been extended to 2015) have 

also contributed by boosting refinancing and 

helping reduce the weight of the shadow 

inventory on home prices. After an expansion of 

the program, HARP refinancing activity increased 

in 2012 and as of March 2013 amounted to more 

than 20 percent of total GSE refinancing (Chart). 

More than 1.1 million homeowners have benefited from a permanent loan modification through 

HAMP. The 2012 national mortgage settlement has further extended the scope of mortgage 

0

5

10

15

20

25

30

35

40

-

20,000 

40,000 

60,000 

80,000 

100,000 

120,000 

140,000 

160,000 

Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13

HARP LTV 80-105%

HARP LTV 105-125%

HARP LTV>125%

Sources: FHFA; Haver Analytics; IMF staff estimates.

1/ LTV is the current loan to value ratio;the outstanding mortgage balance divided by 

appraised home value.

Monthly Volume of HARP 

Refinancing by LTV 1/
UNITED STATES

INTERNATIONAL MONETARY FUND 19

remediation efforts.4 Efforts are underway to enhance these programs, in particular to increase the 

public’s awareness of HARP options and to increase HAMP loan modifications through a streamlined 

modification process. The Consumer Finance Protection Bureau (CFPB) has recently introduced a 

qualified mortgage (QM) standard that will take effect in January 2014 and is expected to reduce 

regulatory uncertainty by clarifying a lender’s obligation to determine the borrower's ability to 

repay. Work is still ongoing on the qualified residential mortgage (QRM) standard, which will set the 

standards that mortgages must meet to be exempt from the risk retention rules mandated by the 

Dodd-Frank Act. 

26. Staff welcomed progress, but argued that there is still room for policies to support the 

housing market recovery. Despite the recent rebound in house prices and market activity, the 

legacy of the housing boom and bust (including continued foreclosure activity, the still large 

number of distressed loans, and continued tight access to mortgage credit for some households) is 

expected to weigh on the recovery. The number of households that are “underwater” on their 

mortgages (i.e., estimated to owe more than what their homes are worth), while declining, is still 

elevated: more than 10 million homeowners, representing about 20 percent of all mortgages. 

Mortgage originations for new purchases have also remained subdued, increasing by only 5 percent 

year-on-year in 2013:Q1, even as mortgage rates have been at their historic lows. In addition, house 

prices and sales have been boosted, perhaps temporarily, by strong investor demand in some 

markets. Staff was pleased to see the recent extension of the government-backed housing programs 

and saw value in extending them in a few areas, including letting the refinancing program cover 

loans not guaranteed by the GSEs. The authorities said that they were continuing to evaluate HARP 

expansion, noting that loan modifications and refinancing are preferred over foreclosures and short 

sales in addressing the remaining stock of distressed loans. Staff stressed the need to expeditiously 

complete regulations requiring banks to retain part of mortgage risk on their balance sheet 

(finalizing QRM standards). It also noted that a number of other frictions appear to make lenders 

more cautious than normal and could require policy intervention. For example, lenders remain 

concerned about “put back risk”—the risk that they will be required to repurchase defaulted loans 

from the GSEs. The authorities agreed that mortgage conditions remain relatively tight, but noted 

that regulatory uncertainty is being lifted, including through the finalization and clarification of 

standards on qualified mortgages, and current conditions could in some cases reflect excess caution 

by market participants. 

27. With a housing market recovery underway, staff and the authorities agreed on the 

importance of gradually reducing the dominant role of the GSEs in the mortgage market. 

Currently, the GSEs (such as Fannie Mae and Freddie Mac) and Ginnie Mae account for nearly all 

issuance of mortgage-backed securities, up from about 45 percent prior to the crisis, also reflecting 

the fact that—with only households with high credit scores effectively able to get mortgages—

almost all new mortgages meet the “conforming loan” standards required by the GSEs. The 

 

4

 The state attorneys general and the federal government settlement with major banks in February 2012 resolved 

claims about improper foreclosures and abuses in loan servicing, providing as much as $25 billion in relief to 

distressed borrowers and in payments to states and the federal government. 
UNITED STATES

20 INTERNATIONAL MONETARY FUND

authorities noted that efforts were underway to encourage the return of private capital to the 

mortgage market. The Federal Housing Finance Agency (FHFA) has recently increased the fees 

charged by the GSEs to guarantee securitized loans, issued plans to develop a more modern 

securitization platform to be placed outside of the domain of the GSEs and announced that GSE 

loan purchases will be limited to loans that follow the QM standard. Staff noted that additional 

measures could involve further increases in guarantee fees and lower thresholds for conforming 

loans, with the authorities noting that the latter measure would require congressional action. At the 

same time, staff and authorities agreed that progress in this direction needs to be gradual and take 

into account the potential for possible negative consequences on the nascent housing market 

recovery. In regard to staff’s suggestion for an early adoption of a fully articulated medium-term 

strategy to gradually reduce the footprint of the GSEs, the authorities noted that there was growing 

bipartisan convergence on the issue and that the FHFA had scope to spur the transition process 

towards one of the long-run structures of the market envisaged by the Treasury’s 2011 White Paper, 

given the many common elements among those structures.5

 

E. Challenges Facing the Labor Market 

28. Staff and authorities discussed the extent to which the decline in labor force 

participation over the past few years is cyclical or structural. If some or most of this decline is 

cyclical, then the fall in the unemployment rate would overstate the improvement in the labor 

market, something the Fed would need to take into account in its decisions on monetary policy 

tightening. The authorities noted that it is very difficult to quantify the relative contribution of trend 

versus cyclical determinants of labor supply. While there is clearly a cyclical component in declining 

labor force participation (as well as underutilization of labor), they considered that there was also an 

important structural component driven by demographic factors (the aging of the baby-boom 

generation). In light of this, they expect participation to remain broadly constant for the next couple 

of years, with a cyclical rebound offsetting the trend decline. Staff broadly agreed with this view, but 

expects participation to rise temporarily over the next 

couple of years, as individuals who have temporarily 

abandoned the labor market re-enter the workforce in a 

stronger demand environment—the share of 

“discouraged” workers in the working age population 

increased by a full percentage point by May 2013 relative 

to December 2007. Underlying staff unemployment 

forecasts is the assumption that this share begins to 

decrease in 2014 and returns to its pre-recession level by 

end-2016, causing participation to increase by about 

0.15 pp per year during 2014–16 (Chart). 

 

5

 The 2010 Financial Sector Assessment Program (FSAP) called for the possible privatization of the GSE retained asset 

portfolios and for a move towards a public utility model with a clear separation of their responsibility for social 

policy. 

5.5

6.0

6.5

7.0

7.5

8.0

8.5

2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 2016Q1

Unemployment Rate 

(Percent)

Staff Projection

Labor Force Participation Fixed at Q1 2013 level

Souces: BEA; Haver Analytics; IMF staff estimates.
UNITED STATES

INTERNATIONAL MONETARY FUND 21

29. Staff and authorities also agreed that policy action is still needed to avoid the risk that 

long-term unemployment turns structural. Despite having decreased over the past year (to 

2.8 percent of the labor force in May 2012 from 31⁄2 percent a year before), the long-term 

unemployment rate remains high. As a result, the risk remains of human capital loss and reduced 

attachment to the labor force, which in turn could lead to lower potential GDP output. The 

authorities stressed the importance of policies to support the recovery in aggregate demand to 

forestall this important risk. In addition, they emphasized a number of labor market initiatives. First, 

the extension of emergency unemployment benefits for 2013 will serve as a social safety net and 

facilitate the skills matching process. Second, a number of ongoing policies—including training and 

employment programs that serve dislocated workers, low-income adults, and disadvantaged 

youth—will be maintained. Finally, additional measures were proposed in the FY2014 President 

budget, including reforms to the “Reemployment Now Program” to help unemployment insurance 

claimants get back to work more quickly, and a $12.5 billion allocation to the “Pathways Back to 

Work Fund,” helping low-income workers remain in the labor force and gain new skills. 

30. In line with previous advice, staff argued for a stronger emphasis on active labor 

market policies. Staff noted that training and support for job search have shown to improve the 

prospects of long-term unemployed workers, but that resources for these types of programs 

continue to be lower in the United States than other OECD countries. Staff welcomed the 

authorities’ efforts to strengthen human capital and skill formation, in particular the programs 

addressed to make college affordable to students from lower-income families, as well as those 

designed to provide training to workers in skills needed in advanced manufacturing and other 

emerging sectors. Efforts to strengthen the link between the education system—particularly 

community colleges—and employers, including through apprenticeships, would also help improve 

labor market matching.

F. Financial Sector Conditions and Policies 

31. The U.S. banking system has improved significantly over the last 12 months and looks 

resilient to adverse shocks. The authorities noted that profitability continues to benefit from costcutting efforts, strong mortgage refinancing activity, and loan loss reserve releases. Asset quality is 

improving as the housing market recovers and 

legacy assets are restructured. Capital ratios 

continue to be supported by robust earnings and 

liquidity buffers are ample, as signaled by large 

holdings of cash and high-quality securities. Going 

forward, however, staff and authorities agreed that 

cost cutting and loan loss reserve releases are not 

sustainable sources of long-run growth in earnings. 

At the same time, as net interest margins are under 

pressure from protracted low interest rates, banks 

may have been induced to extend the duration of 

their securities profile, increase credit risk in loan or 

0

250

500

750

1,000

2011 2012 2013

JPM

MS

GS

BoA

WFC

Citi

Bank Five-Year CDS Spreads

(Basis points)

Range of Eleven 

Other

SCAP/CCAR 

Banks

Sources: Bloomberg L.P.; IMF staff calculations.
UNITED STATES

22 INTERNATIONAL MONETARY FUND

securities books, or relax risk management practices. However, the authorities noted that the results 

of the 2013 Comprehensive Capital Analysis Review (CCAR) stress tests underscored that the capital 

of the largest 18 U.S. bank holding companies is resilient to a range of adverse economic and global 

market shocks—all but one bank met the required 

capital threshold, and several banks announced 

increases in dividends and buybacks following the 

tests. Reflecting the generally strong health of the 

sector, bank equity valuations have increased and 

premia on large banks’ credit default swaps have 

decreased substantially over the last year (Chart). On 

a more cautious note, there is some evidence that 

small and medium sized regional banks are 

increasing the maturity of their investment and loan 

portfolios and their investment in higher-yielding 

securities (Chart). 

32. In regard to the nonbank financial sector, staff raised concerns about potential risks 

arising in a low interest rate and low volatility environment:

 Excessively loose conditions in corporate credit markets. Authorities agreed with staff that a 

prolonged period of low interest rates could have adverse side effects in corporate credit 

markets. Already, there is evidence of weaker loan standards, rising balance sheet leverage, 

reduced protection from covenants, weaker quality of new issuances of corporate bonds and, in 

some cases, less discriminate pricing of 

corporate loans (Chart). Staff expressed 

concern that a faster- and larger-than-expected 

rise in interest rates could expose vulnerabilities 

currently masked by low rates and excess 

liquidity, with reduced secondary market 

liquidity potentially exaggerating dislocations. 

Authorities acknowledged these risks, which 

were stressed in the annual report of the 

Financial Stability Oversight Council (FSOC) and 

speeches by FOMC members, and noted that 

regulators have issued guidance against 

excessive risk-taking. At the same time, investors in these instruments tend to be unlevered, 

reducing the potential for fire sales triggering negative feedback loops, and corporate bond 

valuations are not tight relative to historical levels. 

 Rapid growth in mortgage Real Estate Investment Trusts (REITs). Authorities and staff agreed that 

mortgage REITs—funds that invest primarily in agency MBS― pose a particular concern, given 

their rapid expansion over the last couple of years, large exposure to long-dated and highly 

concentrated assets, and heavy reliance on retail investment and short-term repo funding. 

0

5

10

15

20

25

30

2008Q1 2009Q3 2011Q1 2012Q3

< 1 year 1-5 years 5+ years

Regional Banks: Maturity Structure of the 

Investment Portfolio

(U.S. billions)

Source: SNL Financial.

0

5

10

15

20

25

30

35

40

0

50

100

150

200

250

300

350

1997 1999 2001 2003 2005 2007 2009 2011 2013

Cov-lite Loan Issuance 

(U.S. billions)

Share of Institutional Leveraged 

Loans (RHS, percent)

High Yield Covenant-Lite Loans 1/

Source: Thomas Reuters.

1/2013 figures are based on annualized data through May.

Note: Covenant-lite (cov-lite) loans are loans in which borrowers are not obligated to 

meet quarterly maintenance criteria.
UNITED STATES

INTERNATIONAL MONETARY FUND 23

Increased oversight on these funds may be warranted, given their inherent vulnerability to 

prepayment and interest rate risk and susceptibility to funding pressure. Since the end of the 

consultations in late May, the combination of higher long-term rates, wider MBS spreads, and 

increased volatility have caused significant balance sheet losses and underperformance of REIT 

shares. In turn, this has led to an increase in REITs' borrowing costs and cost of capital. 

Meanwhile, their need to rebalance hedges as a result of the extension in the duration of their 

portfolios has reinforced the rise in long-term rates. 

 Diminished margins and underfunding pressures for insurance companies and defined-benefit 

pension funds. Staff expressed concern about the risk that structural underfunding and low 

return on fixed income securities could lead defined-benefit public pension funds to search for 

yield. Already, the weakest public pension 

funds appear to have meaningfully 

increased their allocations to more risky 

investments (Chart).6

 Authorities 

acknowledged that unfunded liabilities in 

public pension funds are a concern, and 

noted that over 40 states have changed, or 

are about to change, their pension systems 

to address this issue. Staff also noted that 

the low interest rate environment poses 

challenges for insurance companies: while 

the industry has managed to lower its guaranteed rates by re-pricing and redesigning products, 

the net yield earned on its investment portfolio has declined by more, narrowing investment 

margins. Authorities said that they were closely monitoring the industry on concern that life 

insurers may take on additional credit and liquidity risk in their investment portfolio to offset 

margin compression. There is also the possibility that insurers may take additional risk on the 

liabilities side of the balance sheet, such as by offering more aggressive incentives to 

policyholders. 

33. Staff welcomes the recent finalization of the rule implementing Basel III capital 

requirements. The Federal Reserve in early July issued a final rule, coordinated with the Federal 

Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), 

implementing in the U.S. the Basel III regulatory capital reforms. The phase-in period for larger 

institutions begins in January 2014, while for smaller banks it will begin in January 2015. The 

 

6

 In the private sector, the funding ratio of the 100 largest defined-benefit corporate pension plans decreased 

modestly from 79 percent at end-2011 to 77 percent during 2012, owing to the record-low discount rates (Milliman 

Inc., Pension Funding Study, March 2013). The rising tide of required pension contributions has been mitigated by 

last year’s legislation that allows corporations to smooth the calculations of discount rates over a long horizon. A 

number of corporations have attempted to reduce their exposure to pension-related risks, for example by offering 

lump-sum payments to beneficiaries or shifting their pension liabilities to insurance companies. 

60

65

70

75

80

70 65 60 55 50 45

More Risk

Less Funded

2001 2002

2003

2004 2005

2006 2009

2007

2010

2008

2011

Risk Tolerance for Weakest 10 

Percent of U.S. Public Pension Funds

Percent of asset allocation to risk assets 

(equities, alternatives)

Funded Ratio (Assets in percent of Liabilities)
UNITED STATES

24 INTERNATIONAL MONETARY FUND

authorities indicated that proposed rules on Basel III liquidity standards are expected to be issued 

later this year. 

34. Completing the implementation of the financial reform agenda remains essential to 

mitigate systemic risk. Staff noted that key parts of the Dodd-Frank Act that were considered close 

to be implemented during the last Article IV consultation had not yet been finalized. The authorities 

emphasized that the implementation of the Dodd-Frank Act gained momentum over the course of 

2013, with a series of key rules expected to be finalized by year-end: 

 Regulation of the shadow banking system. The designation process of nonbank Systemically 

Important Financial Institutions (SIFIs) has reached the final stage for a few firms. In regard to the 

regulation of Money Market Mutual Funds (MMMFs), a critical area in the eyes of staff especially 

given evidence of a pick-up in their risk profile within the low return environment, the SEC has 

recently proposed rules following a recommendation by the FSOC.7

 Staff sees the proposed 

rules as a first step in addressing the remaining vulnerabilities. Authorities also pointed to the 

progress made in reducing systemic risk in the tri-party repo market, particularly through 

reducing the reliance on discretionary credit extended by the two clearing banks. Still, they 

agreed with staff that more needs to be done to increase the resiliency of the settlement 

process to a broker-dealer default and the risk of fire sales. More generally, staff underscored 

the importance of data collection efforts on wholesale funding markets (including repo and 

securities lending), along the lines of recent initiatives by the Treasury Department’s Office of 

Financial Research (OFR) and the Federal Reserve.

 Volcker rule. The authorities argued that the delay in finalizing the rule reflects the complex 

coordination of the several regulatory agencies involved in writing the rules, the objective 

difficulty in clarifying the distinction between market-making and proprietary trading, and 

consideration of all comments received on the proposed rule. Staff emphasized the need to 

minimize the effect of the rule on bond market liquidity, including negative international 

spillovers. At the same time regulators would need to be mindful of the migration of risk to less 

regulated financial institutions and the potential costs imposed on banks and corporates.8

 Insurance regulation. Staff noted that, in line with the findings of the 2010 FSAP, the fragmented 

regulatory structure, combined with a lack of timely and publicly-available data, might 

complicate monitoring the build-up of risks in this sector. The authorities recognized that in the 

 

7

 On June 5 2013, the SEC has proposed that prime MMMFs (currently accounting for over 50 percent of assets under 

management by money funds) be forced to let their share prices “float”. Funds that invest at least 80 percent of their 

assets in cash or government debt would be exempt from the change, as would funds designated purely for retail 

customers, which would be required to restrict withdrawals by any one customer to $1m per day. As an alternative, 

prime funds could keep the stable $1 share price, but would be required to impose liquidity fees on withdrawals and 

impose restrictions on withdrawals in times of stress. The SEC said it was considering whether to combine both 

measures into a single reform package, and requested feedback as part of a 90-day public comment period. 

8

 These issues are discussed in Viñals et al., “Creating a Safer Financial System: Will the Volcker, Vickers, and Liikanen 

Structural Measures Help?” IMF Staff Discussion Note 13/4 (May 2013). 
UNITED STATES

INTERNATIONAL MONETARY FUND 25

absence of a national regulatory framework, strong coordination between state regulators and 

federal authorities, including better data sharing, is important to ensure effective monitoring 

and supervision, especially of large and complex insurance groups. For some of them, enhanced 

supervision and regulation is likely to occur through their designation as nonbank SIFIs.9

35. Staff underscored the importance of achieving greater international coordination 

among national regulators and supervisors, as this would reduce fragmentation of the global 

financial regulatory landscape, limit the scope for regulatory arbitrage, and reduce uncertainty and 

compliance costs. Authorities agreed and argued that they strive to achieve coordination with other 

jurisdictions whenever possible. At the same time, they emphasized that differences across national 

financial systems justify some regulatory disparities. Furthermore, imposing stricter regulatory 

domestic standards aims at reducing systemic risk both in the United States and globally, rather 

than giving national institutions a competitive advantage, and should thus be seen as a “race to the 

top.” The discussion focused on two specific areas: 

 Over-The-Counter (OTC) derivative markets reform. Authorities noted that many of the 

commitments agreed to at the G-20 Pittsburgh Summit on OTC derivatives trading and clearing 

had already been honored. Good progress has been made on the rules for trade execution and 

reporting, and the movement to central clearing is progressing on schedule. Staff noted that the 

reform will need to be implemented carefully to resolve conflicts and inconsistencies among 

jurisdictions given the cross-border nature of OTC derivative markets. 

 Foreign Banking Organizations (FBOs). Authorities noted that the rule proposed by the Federal 

Reserve in November 2012 (requiring FBOs to organize all their banks and nonbank subsidiaries 

active in the United States into a U.S. intermediate holding company) was mandated by the 

Dodd-Frank Act, and that it will strengthen the U.S. financial system by imposing to FBOs the 

same capital and liquidity requirements applied to U.S. banks. Authorities also noted that the 

U.S. banks abroad are generally subject to local regulatory standards and that the proposal is 

consistent with the FDIC’s articulation of a “single point of entry” model, which they view as the 

most efficient approach to the resolution of cross-border subsidiaries. Staff agreed that the rule 

would enhance domestic financial stability, having flagged in the past potential risks arising 

from investment banking activities by foreign banks, but encouraged the authorities to ensure 

that it remains consistent with the Financial Stability Board key attributes of effective resolution 

regimes and does not unduly add costs on internationally active banks. 

36. Authorities and staff agreed that strong macroprudential oversight and supervision of 

the financial system remain essential to address emerging vulnerabilities. The authorities 

argued that the FSOC has fostered a notable increase in inter-agency coordination, including 

through information sharing and high frequency of meetings, as well as an enhanced focus on 

systemic risk analysis, as shown in the FSOC annual report. The work of the OFR, including on 

 

9

 Two large insurance companies (AIG and Prudential Financial) have indicated that they were among the nonbank 

financial institutions that the FSOC intends to designate as systemically important. 
UNITED STATES

26 INTERNATIONAL MONETARY FUND

developing early indicators of systemic risk and increasing available data for monitoring financial 

stability, especially on shadow banking and the insurance sector, was also important in this respect. 

While recognizing that the establishment of the FSOC greatly improved coordination across U.S. 

regulators and the monitoring of systemic risk, staff argued that it would be important to ensure 

that FSOC recommendations can be implemented swiftly if needed. Staff also emphasized the need 

to ensure adequate resources for the regulatory agencies to effectively monitor financial institutions 

and markets. 

37. Staff discussed plans to improve access to information about who ultimately owns and 

controls companies and trusts. In this respect, staff noted the lack of significant progress since the 

last Financial Action Task Force mutual evaluation report of June 2006. Measures intended to help 

prevent the abuse of legal persons and arrangements for financial crimes—including tax evasion—

have still not been implemented.10 Staff encouraged the authorities to proceed along these lines 

expeditiously, and reinvigorate previously announced initiatives to require the collection of 

information about beneficial ownership and control when companies are formed or beneficial 

ownership or control changes, as this will likely be critical to ensure the effectiveness of the overall 

framework. Authorities expect to issue regulations to strengthen and clarify financial institutions’ 

requirements to identify and verify the identity of the beneficial owners of legal entity customers, in 

accordance with international standards. 

G. The United States and the World Economy 

38. Staff argued that the U.S. external position is moderately weaker than implied by 

medium-term fundamentals and desirable policies. The current account deficit has been around 

3 percent of GDP since 2009, and is projected by staff to remain broadly stable over the next few 

years as higher imports are offset by lower oil prices and increased domestic energy production. As 

interest rates return to more normal levels, the U.S. net international investment position is 

projected to deteriorate slightly. In staff’s view, the U.S. dollar is mildly overvalued and the current 

account deficit 1⁄2–1 percent of GDP larger than the level consistent with fundamentals and desirable 

policies (see Box 3). Staff simulations suggest that gradual fiscal consolidation aiming for a general 

government structural primary surplus of around 1 percent of GDP over the medium term, together 

with some depreciation of the dollar (in a 0–10 percent range) and adjustment in partner countries’ 

policies geared towards global rebalancing, would result in the desirable strengthening of the 

current account by 1⁄2–1 percent of GDP in the context of full employment. 

39. The authorities broadly agreed with the staff’s projection for the current account, the 

external outlook and drivers of rebalancing. The current account deficit is expected to be 

contained as the economy recovers, in part owing to lower energy imports (reflecting the boom in 

 

10 There is no official estimate of U.S. tax evasion. The “net tax gap” (tax never collected) was assessed by the Internal 

Revenue Service at roughly $385 billion in 2006. This estimate consists of non-filing, underreporting, and 

underpayment but includes only a fraction of international tax evasion, a part of excise tax evasion, and excludes 

evasion of the state and local taxes. The total tax gap could be in the region of $0.5 trillion. 
UNITED STATES

INTERNATIONAL MONETARY FUND 27

unconventional energy production) and to remain below pre-crisis levels. As the global recovery 

continues, the unwinding of “flight to safety” flows and currency appreciations in partner countries 

may lead to some dollar depreciation, while the lower budget deficit is expected to have a positive 

impact on external accounts. Demand from trading partners continues to be weak and the 

authorities viewed possible adverse developments in Europe as the key external risk to the ongoing 

domestic economic recovery. Authorities did not take a view on the appropriateness of the value of 

the dollar, which they view as market determined. That said, they argued that the recent reduction in 

global imbalances seems to reflect cyclical rather than structural factors and, looking forward, they 

emphasized the importance of global rebalancing through pro-growth policies in trading partners 

and currency appreciation in emerging markets with controlled exchange rates and current account 

surpluses. 

40. Staff underscored the important spillovers to the rest of the world from policy actions 

in the United States. As highlighted in the 2013 Spillover Report, recent policies, including 

avoidance of the fiscal cliff and unconventional monetary policy accommodation in the United 

States, have sustained growth and reduced tail risks, thus lowering uncertainty and financial stress. 

However, a long period of exceptionally low interest rates has also complicated the macroeconomic 

policy environment in some emerging markets. Unwinding monetary policy accommodation is likely 

to present challenges and abrupt and sustained moves in long-term interest rates could result in 

reversals of capital flows to emerging markets and higher market volatility, as suggested by the 

market reaction to Fed communication in May–June of this year, concerning the timing of 

unwinding asset purchases. A rapid increase in long-term rates could imply sharp capital outflows 

from a number of countries, particularly those with higher risk profiles, as discussed in the 2013 

Spillover Report. Authorities noted—and staff agreed—that any spillovers from monetary exit are 

likely to depend on the conditions under which such exit takes place. Authorities also emphasized 

that capital inflows to emerging markets generally reflect “pull” factors (including strong growth 

prospects and more favorable macro economic conditions than in the past) rather than “push” 

factors (including those related to unconventional monetary policies in the United States). 

41. The authorities’ trade policy agenda has become increasingly active, and they intend 

to seek Trade Promotion Authority from Congress, which would ease the passage of trade 

agreements. The agenda prioritizes the pursuit of both multilateral negotiations and plurilateral and 

bilateral trade agreements—the potentially most important initiatives are the Trans Pacific 

Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). Both agreements 

could entail significant and lasting economic gains if negotiations are successful in reducing nontariff barriers and making regulatory policy more coherent. In doing so, they could also establish 

higher-standard norms that will influence future multilateral agreements. At the same time, there is 

a risk of a fragmentation of the global trading system in the event Free Trade Agreements become 

closed and much deeper than multilateral agreements. With regard to multilateral negotiations at 

the WTO, the authorities stressed the need to explore a package with measures related to trade 

facilitation, as well as some agricultural and development issues, ahead of the Bali Ministerial 

Meeting in December 2013. The Administration is also prioritizing the enforcement of WTO rulings 
UNITED STATES

28 INTERNATIONAL MONETARY FUND

and trade agreements, particularly with the recent establishment of the Interagency Trade 

Enforcement Center. 

STAFF APPRAISAL 

42. The U.S. recovery has remained tepid, but improving underlying conditions bode well 

for a gradual acceleration of growth. Last year’s sluggish growth reflected legacy effects from the 

financial crisis, continued fiscal consolidation, a weak external environment, and temporary effects of 

extreme weather-related events. However, the underlying recovery is gaining ground, supported by 

a rebound in the housing market, a boost to household net worth from higher house and stock 

prices, and—despite the recent tightening—still easy financial conditions. These factors are helping 

to offset the negative growth impact of strong fiscal adjustment, although average growth is still 

likely to be slower this year relative to 2012. The pace of recovery is projected to accelerate later this 

year as the fiscal policy headwinds subside. Growth is also expected to benefit from continued 

monetary accommodation, and further strengthening of the housing market and household balance 

sheets. 

43. The fiscal deficit reduction in 2013 is excessively rapid and ill designed. In particular, the 

automatic spending cuts (“sequester”) not only reduce growth in the short term, but indiscriminate 

reductions in education, science, and infrastructure spending, if protracted, could also reduce 

medium-term potential growth. These cuts should be replaced with a back-loaded mix of 

entitlement savings and new revenues, along the lines of the Administration’s budget proposal. The 

slower pace of deficit reduction would help the recovery at a time when monetary policy has limited 

room to support it further. 

44. Despite the substantial deficit reduction achieved over the past several years, the 

gradual normalization of interest rates and the impact of population aging and health care 

costs on spending imply that public finances remain on an unsustainable path over the longer 

term. The general government deficit has more than halved from over 13 percent of GDP in 2009 to 

a projected 5.9 percent of GDP in 2013, and will continue to shrink over the next few years, partly as 

revenues recover with faster economic growth. However, the longer-term debt profile remains 

unsustainable. Despite the slowdown in growth rates over the past few years, spending on major 

health care programs and Social Security is expected to increase by close to 2 percentage points of 

GDP over the next decade. Staff projects a similar increase over the same period for net interest 

outlays, as interest rates gradually return to neutral levels. These factors would cause the budget 

deficit to widen and put the ratio of public debt to GDP again on an upward path—and from a 

relatively high starting point. 

45. Together with a slower pace of deficit reduction in the short term, the authorities 

should promptly adopt a comprehensive and back-loaded plan entailing lower growth in 

entitlement spending and higher revenues. New revenues could be raised through a fundamental 

tax reform which would simplify the tax code and broaden the tax base through a reduction in 

exemptions and deductions, as well as through the introduction of a carbon tax and a value added 
UNITED STATES

INTERNATIONAL MONETARY FUND 29

tax. Spending measures would need to curb the growth in public health care and pensions outlays—

and early legislative action is important in order to generate meaningful savings in these areas 

during the next decade, given the very gradual pace at which such savings accrue. Some measures 

along these lines, including health care savings and the re-indexation of public pensions to the 

chained CPI, are proposed in the Administration’s budget for FY2014, but additional action would be 

needed to contain the steady growth in mandatory spending as a share of the economy. Overall, 

reaching over the longer term a primary surplus for the general government of about 1 percent of 

GDP (compared to a primary deficit of around 1 percent in staff’s baseline projection) would put the 

debt ratio firmly on a downward path. 

46. Implementing this fiscal strategy would help global growth in the short run and favor 

the rebalancing of global demand and the reduction of global imbalances over the medium 

term—together with efforts to increase domestic demand in surplus countries, as highlighted in the 

G-20 Mutual Assessment Process. In the short run, it would partly relieve monetary policy of its 

burden of supporting the recovery, reducing the risks to U.S. and global financial stability from a 

prolonged period of low interest rates. This more balanced policy mix would support U.S. growth, 

with more favorable outward spillovers. In the medium run, it would help contain the future rise in 

long-term interest rates, thus promoting growth, as well as reduce the risk of turmoil in the Treasury 

market, which would have severe domestic and global repercussions. 

47. While the macroeconomic benefits of asset purchases continue for now to outweigh 

the costs, the Fed should continue its preparations for a smooth exit. The highly 

accommodative monetary policy stance has provided important support to the U.S. and global 

economic recovery, and under staff’s growth projections a continuation of large-scale purchases 

through end-2013 is warranted. However, a long period of exceptionally low interest rates may 

entail potential unintended consequences for domestic financial stability and has complicated the 

macro-policy environment in some emerging markets. While the Fed has a range of tools to help 

manage the exit from its current highly accommodative policy stance—including adjusting interest 

on excess reserves and conducting reserve-draining operations with an expanded list of 

counterparties—unwinding monetary policy accommodation is likely to present challenges. The 

large volume of excess reserves and the segmented nature of U.S. money markets could affect the 

pass-through of the policy rate to short-term market rates. At the same time, effective 

communication on the exit strategy and a careful calibration of its timing will be critical for reducing 

the risk of abrupt and sustained moves in long-term interest rates and excessive interest rate 

volatility as the exit nears, which could have adverse global implications, including a reversal of 

capital flows to emerging markets and higher international financial market volatility. 

48. Despite the improvements over the last 12 months, there is still room for policies to 

support the housing market. The rebound of the housing sector has benefited from governmentbacked programs that facilitated refinancing and modification of loans under stress. As a stronger 

housing market remains an essential component of the U.S. economic recovery, it would be 

important to maintain those programs in place and extend their reach in a few areas, including an 

extension of the refinancing program to loans not guaranteed by Government-Sponsored 
UNITED STATES

30 INTERNATIONAL MONETARY FUND

Enterprises (GSEs). Certain key regulatory rules, such as the Qualified Mortgage rule, have been 

issued. The finalization of remaining rules on risk retention would help to reduce uncertainty that 

may have hampered mortgage origination, and favor the return of private capital to the housing 

finance system. Moreover, as the housing market recovers, consideration should be given to the 

adoption of a fully articulated medium-term strategy to gradually reduce the footprint of the GSEs. 

49. Persistent weak labor force participation rates and high levels of long-term 

unemployment suggest there is room for active labor market policies to complement efforts 

to boost domestic demand. These policies can include training and support for job search, as well 

as efforts to strengthen the link between the education system—particularly community colleges—

and employers, including through apprenticeships. These efforts can help reduce the risk of human 

capital losses which would lower potential growth for the U.S. economy. 

50. The U.S. banking system is healthier than last year, but emerging risks from 

persistently low rates need to be carefully monitored. Banks have expanded their balance sheets, 

increased loan books, and improved liquidity positions, while at the same time reducing the 

riskiness of their portfolios. The quality and quantity of capital have been expanded, and the 2013 

Fed stress tests and capital planning evaluations for the largest 18 U.S. banks suggest it would be 

resilient to very severe shocks. That said, there are some incipient signs of rising exposure to both 

interest rate and credit risk in regional banks that require increased vigilance, as low interest rates 

squeeze interest margins. 

51. In a low interest rate environment, vulnerabilities may also be building in the nonbank 

financial sector, with a rapid expansion of agency Real Estate Investment Trusts (REITs), weakening 

underwriting standards in the leveraged loan market (covenant-lite loans issuance has returned to 

pre-crisis levels), and higher credit and liquidity risks taken by pension funds and insurance 

companies. Strong macroprudential oversight and supervision of the financial system remain 

essential to address these emerging vulnerabilities. 

52. The regulatory architecture has been strengthened relative to the pre-crisis period, but 

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

the risk of international financial regulatory fragmentation. Staff welcomes the finalization of 

the rule implementing Basel III capital requirements. Key items that remain on the agenda are 

finalizing the designation of nonbank systemically-important financial institutions, further 

strengthening of regulation of money market funds (the recent proposal by the Securities and 

Exchange Commission being a useful first step), and reducing systemic risk in the tri-party repo 

market. Close attention is also needed to ensure that the finalization and implementation of the 

Volcker Rule take place in a manner that minimizes the effect of the rule on bond-market liquidity, 

including importantly negative international spillovers. At the same time, regulators would need to 

be mindful of the migration of risk to less regulated financial institutions. Notable progress has been 

achieved with new rules on centralized clearing of OTC derivatives, in line with G-20 commitments. 

These will need to be implemented carefully to resolve conflicts and inconsistencies among 

jurisdictions given the cross-border nature of the OTC derivative markets. More generally, the 

bolstering of regulatory policies to support financial stability should be coordinated with the global 
UNITED STATES

INTERNATIONAL MONETARY FUND 31

financial reform agenda as this would reduce fragmentation of the global financial regulatory 

landscape and limit uncertainty and the scope for regulatory arbitrage. This is particularly important 

in light of the size and global role of the U.S. financial system. 

53. Over the medium term, a strengthening of the U.S. external position through some 

improvement in the current account deficit, which has remained around 3 percent of GDP 

since 2009, would be desirable. The current account deficit is expected to remain broadly stable 

over the next few years as higher imports due to stronger domestic demand are offset by lower oil 

prices and increased domestic energy production. Still, this would imply a further—if slow—

deterioration in the U.S. net international investment position, entailing over time higher interest 

payments overseas. The mild dollar overvaluation could be unwound and the external position 

strengthened through a gradual but sustained reduction in the budget deficit, accompanied by 

some depreciation of the dollar and adjustment in partner countries’ policies geared towards global 

rebalancing. This would allow for a desired strengthening of the U.S. current account balance by 1⁄2–

1 percent of GDP in the context of full employment. 

54. Staff welcomes the authorities’ renewed initiatives in trade, including their intention 

to seek Trade Promotion Authority. The recent progress in promoting plurilateral and bilateral 

trade agreements should contribute to growth, as they can lead to more open trade and deeper 

forms of integration, including by addressing non-tariff measures. This progress should be 

complemented by renewed efforts to advance the multilateral trade agenda. 

55. It is recommended that the next Article IV consultation take place on the standard 12-

month cycle. 

 
UNITED STATES

32 INTERNATIONAL MONETARY FUND

Box 1. U.S. Household Balance Sheets After Five Years of Repair 

One of the key reasons for the weak U.S. recovery has been the drawn-out process of household 

balance sheet repair. In the aftermath of the Great Recession, balance sheets were weakened by the 

bursting of the housing bubble and lower stock prices—household net worth fell sharply from over 

650 percent of disposable income (DI) in 2007:Q1 to 485 percent in 2009:Q1. Households were also overindebted at the onset of the crisis, with the debt-to-income ratio peaking at around 135 percent of DI in 

2007:Q3 compared with ratios around 100 percent in the early 2000s. Low net worth and over-indebtedness 

led consumers to boost their savings, putting a drag on private consumption. 

In the aggregate, household finances have improved substantially in recent years, but progress has 

been uneven across segments of the population.

 Household net worth recovered to 586 percent of disposable income by the end of 2013:Q1, slightly 

above to the long-term average and optimal 

wealth holdings (Carroll, Slacalek, Sommer, 

2012). However, much of the recovery in asset 

values has been driven by higher stock market 

wealth, that tends to boost private 

consumption to a smaller degree than 

housing wealth.

 Aggregate debt has been reduced to about 

110 percent of DI. During the severe financial 

crises in the Nordic economies in the 

1980s/1990s, household leverage eventually 

came down to pre-bubble levels—the United 

States has followed a similar trend so far. 

Non-mortgage consumer credit growth has 

picked up (partly reflecting a boom in 

student loans), but credit conditions remain 

tight in the crucial mortgage market. The 

growing volume of student loans amidst stilldifficult labor market conditions also imply a 

risk that future debt service will weigh on 

consumption.

 The microeconomic evidence provides a 

cautionary tale. Since about two-thirds of the 

decline in aggregate household debt reflects 

households shedding debt through defaults, 

these households may not be able to borrow 

when economic prospects improve. In 

addition, households which had precarious balance sheets before the crisis appeared to have made 

limited progress in rebuilding net worth through active savings out of income as of 2011 (Celasun, 

Cooper, Dagher, and Giri, 2012). In the absence of rapid house price appreciation and income gains, 

these households may need to save more in the future. 

 

50

70

90

110

130

150

170

190

-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8

Household Debt: U.S. now vs. Nordics in 1980s/90s

(Percent of disposable income; pre-crisis at t=0)

Sources: OECD; Norges Bank: Statistics Finland; Riksbank; and IMF staff estimates.

1/The years in parentheses correspond to the peak in the household debt ratio.

Norway (1988)

U.S. (2007)

Sweden (1989)

Finland (1989 1/)

100

130

160

190

220

250

280

350

400

450

500

550

600

2001 2004 2007 2010 2013Q1

Financial Housing (RHS)

Household Assets

(Percent of disposable income)

Sources: Haver Analytics; and IMF staff calculations.
UNITED STATES

INTERNATIONAL MONETARY FUND 33

Box 2. Unconventional Energy Boom and “Manufacturing Renaissance” 

The United States is currently experiencing rapid growth in oil and gas production (Selected Issues 

Chapter II). Technological advances (especially 

horizontal fracturing and drilling) have helped to 

unlock unconventional oil and gas from shale 

formations, reversing a long period of production 

declines. Production of crude oil and other 

petroleum products has increased by roughly 

30 percent over the past 5 years, helping to halve 

the U.S. imports of crude oil. The natural gas sector 

has been booming as well, with output up by 

25 percent over the same period. The U.S. Energy 

Information Agency expects that crude oil and 

natural gas production could increase another 

15 percent over the next decade, although views 

differ greatly among analysts, reflecting in part 

different assessments of infrastructure bottlenecks, environmental risks, and regulatory constrains. 

The energy boom has already had positive effects on the U.S. economy. The direct benefit from higher 

oil and gas output is small given the low share of oil- and gas-related sectors in the U.S. economy (around 

11⁄2 percent of GDP)—mining contributed only 0.1 percentage point to real GDP growth last year. That said, 

technological constraints on gas exports have helped to push the domestic price of natural gas well below 

prices in other major markets, providing a competitive advantage to domestic industries and helping to 

support consumer demand through lower utility prices. Over time, corporations could choose to relocate 

some production to the United States, especially in the energy-intensive sectors such as petrochemical and 

fertilizer industries, aluminum, and steel. Higher capital accumulation would help boost productivity and 

potential output. U.S. companies could also benefit from exporting their technology for extracting 

unconventional energy. 

Indeed, some analysts have interpreted the 

recent growth in durable-goods industries as a 

sign of ”manufacturing renaissance” (Selected 

Issues Chapter I). Besides lower domestic energy 

prices, other supporting factors such as a weaker 

exchange rate, volatile shipping costs, and increases 

in emerging markets’ labor costs could support 

steady increases in manufacturing output and 

employment, beyond those that could be attributed 

to just a cyclical rebound (although durable goods 

manufacturing makes up just 61⁄2 percent of GDP). 

Staff analysis using the GEM model suggests 

that the macroeconomic effects of 

unconventional energy boom will remain positive for the United States but may be modest. Under the 

baseline, the increase in real GDP level attributable to higher domestic energy production could be less than 

1 percent after 10 years, although energy production growth has tended to surprise on the upside, and the 

official production forecasts could prove too pessimistic. The boom could put some appreciation pressure 

on the U.S. dollar, with the energy trade balance improving further, but the current account implications 

appear ambiguous since the higher energy production will stimulate domestic consumption and investment. 

0

2

4

6

8

10

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Tight oil

Other onshore

Offshore

Alaska

Domestic Crude Oil Production by Source

(Million barrels per day) 

Source: EIA.

70

75

80

85

90

95

100

105

110

2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1

Durable vs. Nondurable Manufacturing Goods

(Index, 2007 = 100)

Durables Nondurables

Source: Haver Analytics.
UNITED STATES

34 INTERNATIONAL MONETARY FUND

Box 3. External Sector Developments and External Stability Assessment 

During the past year, the dollar has remained broadly stable in real effective terms, generally

strengthening during periods of higher risk aversion 

and weakening as volatility declined. 

Capital flows to and from the United States remain 

well below pre-crisis levels. Net foreign purchases of 

Treasury securities still account for the lion share of 

inflows (Chart). Portfolio flows out of the United 

States have picked up in late 2012 and early 2013, 

while bank cross-border activity shows a continuation 

of the post-crisis decline. 

Model-based estimates suggest that the current 

account deficit is above its medium-term norm 

and that the real exchange rate is mildly 

overvalued (see Table). 

 Under the External Balance Approach (EBA), 

model estimates suggest that the cyclicallyadjusted current account deficit is about 

1 percentage point of GDP weaker than the value 

implied by medium-term fundamentals and 

desirable policies.1

 Similarly, CGER current account methodologies (such as the Macro Balance (MB) and External 

Sustainability (ES) approaches) find current account gaps of around 1⁄2–11⁄2 percent of GDP. These 

estimates suggest a mild real exchange rate overvaluation. 

 The range of direct estimates of equilibrium real exchange rates is instead centered around zero, 

reflecting primarily the dollar’s current weakness relative to its long-run average. 

-600

-400

-200

0

200

400

600

800

2005 2006 2007 2008 2009 2010 2011 2012 2013

Other

Banks

Portfolio

FDI

Total

Capital Outflows

(Billions US$)

Sources: BEA; IMF staff estimates.

-600

-400

-200

0

200

400

600

800

2005 2006 2007 2008 2009 2010 2011 2012 2013

Other

Banks

Other portfolio

U.S. Treasuries

FDI

Total

Capital Inflows 

(Billions US$)

Sources: BEA; IMF staff estimates.

-300 0 300 600

FDI

U.S. Treasuries

Other portfolio

Banks

Other

-300 0 300 600

FDI

Portfolio

Banks

Other

Outflows

US Capital Flows, 2012Q2–2013Q1 

(Billions of U.S. dollars) 
UNITED STATES

INTERNATIONAL MONETARY FUND 35

Box 3. External Sector Developments and External Stability Assessment (continued)

The United States has a fully open capital account, and vulnerabilities are limited by the dollar’s 

status as a reserve currency and the United States’ role as a safe haven. The U.S. dollar reserve currency 

status and safe haven motives boost foreign demand for U.S. Treasury securities during periods of market 

turbulence even as U.S. overseas investments fall. Hence the outlook for capital flows in the U.S. will depend 

on global financial stability and the pace of economic recovery, as well as on the outlook for the U.S. 

economy and public finances. Risks to external stability could come from a decline in foreign demand for 

U.S. debt securities (the bulk of U.S. external liabilities), driven for example by a protracted failure to restore 

long-run fiscal sustainability. Still, given the dollar’s reserve currency status, current vulnerabilities are 

limited. 

_________________ 

1

 See the 2012 Pilot External Sector Report (www.imf.org) for a discussion of EBA methodologies. 

CA regression, 1/ REER regression, 2/ MB, 3/ ES, 3/ ERER, 4/

Current Account Norm (percent of GDP) -2.9 -2.5 -1.9

Current Account Gap (percent of GDP) -1.0 -0.7 -1.3

Exchange Rate Gap (percentage points) 7 -9 5 9 6

4/ Equilibrium Real Exchange Rate method. Based on early 2013 REER.

3/ Macrobalance (MB) and External Sustainability (ES) methods. Based on CA projected in 2018 and (for the ES method) 2011 Net 

Foreign Assets/GDP.

Model Based Current Account and Exchange Rate Gaps

EBA CGER

1/ Current account (CA) regression method. Based on 2012 cyclically-adjusted CA.

2/ Real effective exchange rate (REER) regression method. Based on 2012 average REER.
UNITED STATES

36 INTERNATIONAL MONETARY FUND

2011 2012 2013 2014 2015 2016 2017 2018

National production and income

Real GDP 1.8 2.2 1.7 2.7 3.5 3.6 3.4 3.0

Net exports 2/ 0.1 0.0 0.1 -0.4 -0.3 -0.1 -0.1 0.0

Total domestic demand 1.7 2.1 1.6 3.0 3.6 3.5 3.3 2.9

Final domestic demand 1.8 2.0 1.5 3.0 3.7 3.5 3.2 2.8

Private final consumption 2.5 1.9 2.1 2.4 2.5 2.6 2.6 2.6

Public consumption expenditure -2.3 -1.3 -3.5 0.4 3.6 2.0 1.6 1.4

Gross fixed domestic investment 3.4 6.1 4.3 7.8 8.9 7.8 6.4 4.8

Private fixed investment 6.6 8.7 6.3 8.9 9.8 8.4 6.9 5.3

Equipment and software 11.0 6.9 5.2 7.8 9.1 7.4 7.0 5.7

Nonresidential structures 2.8 10.8 1.9 4.4 4.2 4.0 4.0 3.4

Residential structures -1.4 12.1 15.1 16.7 16.7 14.3 9.1 5.8

Public fixed investment -7.3 -4.0 -4.4 2.6 4.5 4.8 3.7 2.1

Change in private inventories 2/ -0.2 0.1 0.1 0.1 -0.1 0.1 0.2 0.1

Nominal GDP 4.0 4.0 3.2 4.4 5.4 5.7 5.5 5.2

Personal saving rate (percent of disposable income) 4.3 4.1 3.0 3.5 3.7 4.0 4.1 4.0

Private investment rate (percent of GDP) 12.3 13.1 13.8 14.8 15.6 16.5 17.2 17.6

Employment and inflation

Unemployment rate 8.9 8.1 7.6 7.3 6.8 6.2 5.7 5.5

Output gap (percent of potential GDP) -4.7 -4.3 -4.6 -4.0 -2.8 -1.6 -0.6 -0.2

Potential GDP 1.7 1.8 2.0 2.1 2.3 2.3 2.4 2.4

CPI inflation 3.1 2.1 1.7 1.8 1.9 2.0 2.2 2.2

GDP deflator 2.1 1.8 1.5 1.6 1.9 2.1 2.1 2.2

Government finances

Federal government (budget, fiscal years)

Federal balance (percent of GDP) -9.0 -6.9 -4.6 -3.4 -2.7 -2.8 -2.8 -2.7

Debt held by the public (percent of GDP) 67.8 72.6 75.6 76.6 76.0 75.1 74.2 73.6

General government (GFSM 2001, calendar years)

Net lending (percent of GDP) -10.0 -8.5 -5.9 -4.8 -4.2 -4.2 -4.1 -4.1

Primary structural balance (percent of potential nominal -5.7 -4.4 -1.9 -1.2 -1.0 -1.4 -1.4 -1.3

Gross debt (percent of GDP) 102.4 106.4 108.9 109.8 109.0 108.0 107.1 106.5

Interest rates (percent)

Three-month Treasury bill rate 0.1 0.1 0.1 0.1 0.2 0.9 2.1 3.6

Ten-year government bond rate 2.8 1.8 2.2 2.7 3.5 4.2 5.1 5.4

Balance of payments

Current account balance (billions of dollars) -458 -440 -476 -541 -571 -600 -634 -663

Merchandise trade balance (billions of dollars) -744 -741 -715 -787 -855 -890 -927 -964

Balance on invisibles (billions of dollars) 286 301 239 246 284 289 292 302

Current account balance (percent of GDP) -3.0 -2.8 -2.9 -3.2 -3.2 -3.2 -3.2 -3.2

Merchandise trade balance (percent of GDP) -4.9 -4.7 -4.4 -4.7 -4.8 -4.7 -4.7 -4.6

Balance on invisibles (percent of GDP) 1.9 1.9 1.5 1.5 1.6 1.5 1.5 1.4

Export volume 3/ 7.2 4.2 -0.3 4.0 6.2 6.4 6.1 5.9

Import volume 3/ 5.2 2.1 -0.2 5.8 6.8 5.4 5.1 4.8

Net international investment position (percent of GDP) -24.7 -24.6 -26.7 -28.3 -29.5 -30.6 -31.7 -32.8

Saving and investment (percent of GDP)

Gross national saving 12.2 13.4 13.7 14.4 15.2 16.1 16.8 17.3

General government -6.6 -5.4 -3.0 -1.9 -1.2 -1.1 -1.1 -1.2

Private 18.8 18.7 16.7 16.2 16.5 17.3 17.9 18.4

Personal 3.2 3.1 2.2 2.7 2.8 3.0 3.0 3.0

Business 15.5 15.6 14.4 13.6 13.7 14.3 14.9 15.5

Gross domestic investment 15.5 16.2 16.6 17.6 18.4 19.3 20.0 20.4

Private 12.3 13.1 13.8 14.8 15.6 16.5 17.2 17.6

Fixed investment 12.1 12.8 13.4 14.3 15.3 16.0 16.6 16.9

Inventories 0.2 0.4 0.4 0.5 0.4 0.5 0.6 0.7

Public 3.2 3.0 2.8 2.8 2.8 2.9 2.9 2.8

3/ NIPA basis, goods.

Sources: IMF staff estimates.

1/ Components may not sum to totals due to rounding.

2/ Contribution to real GDP growth, percentage points.

Table 1. United States: Selected Economic Indicators 1/

(Percentage change from previous period, unless otherwise indicated)

Projections
UNITED STATES

INTERNATIONAL MONETARY FUND 37

2010 2011 2012 2013 2014 2015 2016 2017 2018

Current account -449 -458 -440 -476 -541 -571 -600 -634 -663

Percent of GDP -3.1 -3.0 -2.8 -2.9 -3.2 -3.2 -3.2 -3.2 -3.2

Goods and services -499 -557 -535 -490 -542 -584 -592 -603 -613

Merchandise trade -650 -744 -741 -715 -787 -855 -890 -927 -964

Exports 1,289 1,496 1,561 1,583 1,670 1,802 1,955 2,117 2,289

Imports -1,939 -2,240 -2,303 -2,298 -2,456 -2,657 -2,845 -3,044 -3,253

Services 151 187 207 225 245 272 298 324 352

Receipts 556 617 649 684 730 787 848 913 983

Payments -405 -430 -443 -459 -486 -515 -550 -589 -631

Income 178 233 224 147 135 143 125 107 94

Receipts 678 761 776 586 425 419 476 696 1,044

Payments -500 -528 -552 -439 -290 -275 -350 -589 -950

Unilateral transfers, net -128 -134 -130 -133 -133 -131 -133 -138 -144

Capital account transactions, net 0 -1 7 3 6 5 6 7 7

Financial account 438 552 439 447 535 566 594 628 656

Private capital 26 430 -31 113 166 186 190 203 208

Direct investment -95 -179 -222 -223 -230 -241 -255 -269 -283

Outflows -301 -409 -388 ... ... ... ... ... ...

Inflows 206 230 166 ... ... ... ... ... ...

Securities 344 96 263 116 193 191 208 219 231

Other investment -223 513 -72 219 203 235 237 252 260

U.S. official reserves -2 -16 -4 -1 ... ... ... ... ...

Foreign official assets 398 254 394 335 368 380 404 425 447

Other items 1/ 31 -65 78 5 ... ... ... ... ...

Statistical discrepancy 12 -93 -6 25 ... ... ... ... ...

Memorandum Item: 

Current account excluding petroleum -167 -109 -127 -197 -274 -307 -345 -385 -419

Sources: IMF staff estimates.

1/ Includes net financial derivatives.

Projections

Table 2. United States: Balance of Payments

(Billions of U.S. dollars, unless otherwise indicated)
UNITED STATES

38 INTERNATIONAL MONETARY FUND

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Federal Government

Revenue 15.4 15.8 17.5 18.1 19.1 19.0 18.8 18.7 18.5 18.5 18.6 18.8 18.9

Expenditure 24.1 22.6 22.1 21.5 21.7 21.8 21.5 21.4 21.6 21.9 22.1 22.6 22.6

Noninterest 2/ 22.6 21.2 20.7 20.1 20.2 20.1 19.5 19.1 19.0 19.0 19.0 19.2 19.0

Interest 1.5 1.4 1.4 1.4 1.5 1.7 2.0 2.3 2.6 2.9 3.1 3.4 3.6

Balance 2/ -9.0 -6.9 -4.6 -3.4 -2.7 -2.8 -2.8 -2.7 -3.2 -3.4 -3.5 -3.8 -3.7

Primary balance 3/ -7.2 -5.5 -3.2 -2.0 -1.1 -1.1 -0.8 -0.4 -0.6 -0.5 -0.4 -0.5 -0.1

Primary structural balance 4/ -5.8 -4.2 -1.9 -0.9 -0.3 -0.6 -0.6 -0.4 -0.5 -0.5 -0.3 -0.4 -0.1

Debt held by the public 67.8 72.6 75.6 76.6 76.0 75.1 74.2 73.6 73.7 74.2 74.8 75.8 76.5

Net debt held by the public 61.4 66.8 69.3 69.9 69.0 67.9 66.9 66.2 66.3 66.7 67.3 68.3 69.0

General Government

Revenue 31.4 31.6 33.6 34.1 34.8 34.7 34.4 34.4 34.1 34.1 34.2 34.3 ...

Total expenditure 2/ 41.4 40.1 39.6 39.0 39.0 38.9 38.5 38.5 38.5 38.6 38.8 39.1 ...

Net lending 2/ -10.0 -8.5 -5.9 -4.8 -4.2 -4.2 -4.1 -4.1 -4.4 -4.6 -4.7 -4.8 ...

Primary balance 3/ -7.9 -6.5 -3.9 -2.8 -2.1 -2.0 -1.6 -1.3 -1.4 -1.2 -1.1 -1.0 ...

Primary structural balance 4/ -5.7 -4.4 -1.9 -1.2 -1.0 -1.4 -1.4 -1.2 -1.3 -1.1 -1.0 -0.9 ...

Gross debt 102.4 106.4 108.9 109.8 109.0 108.0 107.1 106.5 106.8 107.3 108.1 109.0 ...

Net debt 82.3 87.1 89.7 90.0 88.9 87.8 86.8 86.2 86.4 86.9 87.5 90.5 ...

1/ Data for 2011 general government revenue, expenditure, and net lending are IMF staff estimates.

Projections

Table 3. United States: Federal and General Government Finances 1/

(Percent of GDP)

3/ Excludes net interest.

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

(Budget basis; Fiscal years)

(GFSM 2001 basis; Calendar years)

Sources: Office of Management and Budget; Haver Analytics; and IMF staff estimates.

2/ Includes staff's adjustments for one-off items, including the costs of financial sector support.
UNITED STATES

INTERNATIONAL MONETARY FUND 39

2007 2008 2009 2010 2011 2012

Revenue 33.9 32.5 30.8 31.2 31.4 31.6

Taxes 21.3 19.6 17.6 18.2 19.1 n.a.

Social contributions 6.9 6.9 6.9 6.8 6.1 6.1

Grants 0.0 0.0 0.0 0.0 0.0

Other revenue 5.8 5.9 6.3 6.2 6.2 n.a.

Expenditure 2/ 36.7 39.2 44.2 42.4 41.4 40.1

Expense 35.6 38.2 43.1 41.4 40.5 39.2

Compensation of employees 10.1 10.4 11.1 11.0 10.7 n.a.

Use of goods and services 8.2 9.1 9.3 9.4 9.2 n.a.

Consumption of fixed capital 1.3 1.4 1.5 1.5 0.0 0.0

Interest 2.9 2.7 2.5 2.6 2.8 2.7

Subsidies 0.4 0.4 0.4 0.4 0.0 0.0

Grants 0.3 0.3 0.3 0.4 0.0 0.0

Social benefits 12.1 13.0 15.1 15.5 15.2 15.6

Of which: Social security benefits 7.7 8.2 9.6 9.7 9.4 9.7

Expense not elsewhere classified 2.4 3.0 5.1 2.9 2.7 n.a.

Net acquisition of nonfinancial assets 1.1 1.0 1.1 1.0 1.0 1.0

Gross/net operating balance 3/ -1.7 -5.7 -12.3 -10.2 -9.1 -7.5

Net lending/borrowing 2/ -2.7 -6.7 -13.3 -11.1 -10.0 -8.5

Net acquisition of financial assets 0.5 3.2 0.3 1.6 -1.9 n.a.

Net incurrence of liabilities 3.5 10.3 11.8 12.4 8.2 7.9

1/ Data for 2012 are IMF staff estimates.

2/ Includes staff's adjustments for one-off items, including the costs of financial sector support.

3/ Revenue minus expense.

Source: Government Finance Statistics.

Table 4a. General Government Statement of Operations 1/

(Percent of GDP) 

2007 2008 2009 2010 2011 2012

Net financial worth -48.0 -54.0 -66.7 -75.1 -82.3 -87.1

Total financial assets 18.5 21.5 22.4 23.1 20.1 19.3

Currency and deposits 2.5 4.8 3.9 4.8 3.1 3.2

Debt securities 6.4 5.7 6.1 5.8 4.5 3.9

Loans 3.2 3.3 4.5 5.2 5.7 6.2

Equity and investment fund shares 1.8 2.8 2.2 2.0 2.0 1.7

U.S. official reserve assets 0.3 0.3 0.7 0.7 0.7 0.7

Other financial asssets 4.4 4.7 5.1 4.6 4.2 3.7

Total financial liabilities 66.5 75.5 89.1 98.2 102.4 106.4

Currency and deposits 0.2 0.2 0.2 0.2 0.2 0.2

Debt securities 52.5 60.7 73.1 81.9 85.8 89.8

Loans 0.0 0.0 0.0 0.0 0.0 0.0

Accounts payable 5.6 6.0 6.0 6.1 6.2 6.3

Insurance reserves 0.3 0.3 0.3 0.3 0.3 0.3

Other financial liabilities 7.8 8.3 9.0 9.3 9.5 9.5

SDR allocations and certificates 0.1 0.1 0.4 0.4 0.4 0.4

 Sources: Board of Governors of the Federal Reserve System; Bureau of Economic Analysis; 

and Haver Analytics.

Table 4b. General Government Financial Assets and Liabilities

(Percent of GDP)
UNITED STATES

40 INTERNATIONAL MONETARY FUND

2006 2007 2008 2009 2010 2011 2012

External indicators

Exports of goods and services 1/ 12.7 13.0 11.1 -14.0 16.2 13.5 4.3

Imports of goods and services 1/ 10.5 6.0 7.7 -22.7 19.2 13.0 3.1

Terms of trade 1/ -0.7 -0.2 -5.3 5.8 -1.4 -1.3 0.2

Current account balance -6.0 -5.1 -4.8 -2.7 -3.1 -3.0 -2.8

Capital and financial account balance 6.0 4.4 5.2 1.7 3.0 3.7 2.8

Of which:

Net portfolio investment 5.9 5.4 1.5 6.0 5.2 1.5 4.7

Net foreign direct investment 0.0 -1.4 -0.1 -1.1 -0.7 -1.2 -1.4

Net other investment 4/ 0.0 0.0 0.1 0.1 0.1 0.0 0.0

Official reserves 2/ 65.9 70.6 77.6 130.8 132.4 148.0 150.2

in months of imports 0.4 0.4 0.4 0.8 0.7 0.7 0.7

Central bank foreign liabilities 2/ 0.1 0.1 1.4 2.4 3.4 0.2 6.5

Net international investment position 5/ -16.4 -12.8 -22.8 -16.3 -15.5 -24.7 -24.6

Of which: General government debt 6/ 20.4 22.7 28.8 31.3 35.1 37.8 39.2

External debt-to-exports ratio 1.5 1.1 1.8 1.4 1.2 1.8 1.8

External interest payments to imports 3/ 7/ 32.5 35.8 28.3 23.1 18.1 16.4 16.3

Nominal effective exchange rate 1/ -1.7 -4.9 -3.9 5.5 -3.3 -4.9 3.3

Real effective exchange rate 1/ -0.6 -4.7 -3.9 4.5 -3.9 -4.9 3.0

Financial market indicators

General government gross debt 66.1 66.5 75.5 89.1 98.2 102.4 106.4

Average maturity of privately-held federal debt (months) 58.0 57.0 46.0 52.0 57.0 59.0 54.0

Federal privately-held debt maturing within one year 8.5 9.2 16.8 17.3 17.6 17.5 18.7

Three-month treasury bill yield 3/ 4.8 4.5 1.4 0.2 0.1 0.1 0.1

Real three-month treasury bill yield 3/ -0.1 1.6 1.6 -2.3 0.5 -1.5 -2.0

Equity market index (S&P 500) 1/ 8.6 12.7 -17.3 -22.5 20.3 11.4 8.7

Banking risk indicators 8/

Total assets 2/ 11,862 13,034 13,841 13,087 13,319 13,883 14,451

Total loans and leases to assets 61 61 57 56 55 54 53

Total loans to deposits 92 94 87 79 78 73 71

Problem loans to total loans and leases 9/ 0.8 1.4 3.0 5.4 4.9 4.1 3.6

Nonperforming assets to assets 10/ 0.5 0.9 1.8 3.4 3.1 2.5 2.5

Loss allowance to:

Total loans and leases 1.1 1.3 2.2 3.1 3.1 2.6 2.1

Noncurrent loans and leases 134.8 91.7 74.4 57.7 64.5 62.5 58.5

Return on equity 11/ 17.2 11.2 -1.6 -0.5 8.1 10.8 12.3

Return on assets 11/ 1.8 1.2 -0.1 -0.1 0.9 1.2 1.4

Total capital to risk-weighted assets 13.0 12.8 12.8 14.3 15.3 15.3 15.1

Core capital ratio 8.2 8.0 7.5 8.6 8.9 9.1 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.

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

7/ External interest payments: income payments on foreign-owned assets (other private assets plus U.S. government 

payments).

(In percent of GDP, unless otherwise indicated)

(In percent of GDP, unless otherwise indicated)

(in percent, unless otherwise indicated)

Sources: IMF, International Financial Statistics; Federal Deposit Insurance Corporation; and Haver Analytics.
UNITED STATES

INTERNATIONAL MONETARY FUND 41

Figure 1. Growth and Inflation 

Source: Sources: BEA; Federal Reserve; BLS; Haver Analytics; and IMF staff estimates.

-6

-4

-2

0

2

4

6

2007 2008 2009 2010 2011 2012 2013 2014

Personal consumption expenditures

Private nonresidential fixed investment

Net exports

Residential investment

Change in Inventories

General Government C&I

Real GDP Growth

Private Final Domestic Demand 

Contributions to Growth

(Percentage points, SAAR)

Recovery from the Great Recession has remained sluggish, but 

growth should pick up next year as the fiscal drag subsides.

70

75

80

85

90

95

100

105

110

115

2007 2008 2009 2010 2011 2012

Materials 

Mining

Durable Goods

Business Equipment

Performance of Selected Industries 

(Index 2007=100)

Mining and durable manufacturing have rebounded in part 

due to booming unconventional energy production.

12

14

16

18

20

2005 2008 2011 2014 2017 2020

Authorities' Projection (OMB)

CBO

Consensus, April 2013

IMF

Trend (2.5 pct growth, p.a.)

Comparison of Real GDP Forecasts

(Trillions of chained 2005 dollars)

Medium-term GDP is projected to remain well below its 

pre-recession trend.

-4

-2

0

2

4

6

8

2005 2006 2007 2008 2009 2010 2011 2012 2013

Core PCE CPI Core CPI

Inflation Measures

(Percent, yoy)

Inflation has decelerated so far in 2013 ...

-10

-8

-6

-4

-2

0

2

2006 2007 2008 2009 2010 2011 2012 2013 2014

... and it is expected to stay subdued given the still large 

output and unemployment gaps ...

Output Gap and Unemployment Gap

(Percent)

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2007 2008 2009 2010 2011 2012 2013

90

92

94

96

98

100

102

Compensation and Unit Labor Costs

Nominal wage inflation

(percent change over

one year; LHS)

Real Unit Labor Costs

(index, 2005:Q1=100,RHS)

... and continued weakness in wage inflation.

2022

Output gap (percent of 

staff potential GDP)

Unemployment Gap (Long-term 

NAIRU - Unemployment Rate)
UNITED STATES

42 INTERNATIONAL MONETARY FUND

Figure 2. Housing Sector

Sources: Amherst Securities, Corelogic, Mortgage Bankers Association, Pulsenomics, Haver Analytics, and IMF staff estimates.

1/ Staff estimate of pending supply of housing units. “Re-Performing Loans” (RPL) represents a share of performing loans previously in default, 

“Real Estate Owned” (REO) properties that are owned by lenders, “Foreclosure” properties that are in the process of foreclosure, “Delinquent” 

(60+ DQ) a share of properties that have mortgage payments more than 60 days overdue, and “Underwater” a share of properties that are 

underwater and likely to be put on the market, but currently not in default (RPL or delinquent)—these are estimated to represent less than 10 

percent of total underwater loans.

2/ Zillow Home Price Expectations Survey. 

-20

-15

-10

-5

0

5

10

15

20

25

30

2005 2007 2009 2011 2013

Selected National House Price Indices

(Percent change, yoy)

FHFA

S&P Case-Shiller CoreLogic

CoreLogic

(excluding distressed sales)

... while house prices have increased sharply

from their lows.

0

2000

4000

6000

8000

10000

0

500

1,000

1,500

2,000

2,500

3,000

2001 2004 2007 2010 2013

Housing Starts

New Home Sales

Existing Home Sales (RHS)

Housing Starts and Sales

(Thousands of units, SAAR)

Housing starts and sales have continued to 

rise over the last 12 months ... 

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2010 2011 2012

RPL

Underwater

60+DQ

Foreclosure

REO

Shadow Inventory 1/ 

(Million of loans)

Falling shadow inventory will support house prices 

going forward ...

200 

600 

1,000 

1,400 

1,800 

2,200 

2,600 

2004 2007 2010 2013

Household Formation

(Thousands of units, annual moving average)

... together with a rebound in household formation.

Pre-crisis average

300

400

500

600

700

800

900

2005 2007 2009 2011 2013

Mortgage Originations 

($Billions, Annual MA)

However, tight lending conditions have constrained 

mortgage originations despite low rates.

70

75

80

85

90

95

100

105

110

115

2005 2007 2009 2011 2013 2015

Expectations as of May 2013

Expectations as of December 2011

Case Shiller Home Price Index 

2007=100

Home Price Market Expectations 2/

(Index 2007=100)

Looking ahead, markets expect house prices to 

continue rising.
UNITED STATES

INTERNATIONAL MONETARY FUND 43

Figure 3. Labor Market 

Sources: Bureau of Labor Statistics; The Conference Board; Bloomberg, L.P.; Haver Analytics; and IMF staff estimates.

-1000

-500

0

500

2008 2009 2010 2011 2012 2013

Government

Private

Total Nonfarm 

Payrolls 6 Mo. MA

Change in nonfarm 

payrolls (thousands)

Major Labor Indicators

1.8

2.0

2.2

2.4

2.6

2.8

3.0

55

60

65

70

1978 1983 1988 1993 1998 2003 2008 2013

Employment/

population

Labor force 

participation 

rate

Employment and Labor Force Participation 

(Percent)

Discouraged 

Workers/Population

Payrolls continue to grow moderately, although they 

have strengthened during the past six months ...

0

25

50

75

100

Less than 

5 weeks

5-14 

weeks

15-26 weeks

Duration of Unemployment

(Percent of unemployed persons) 27+

weeks

88

94

100

106

112

2005 2006 2007 2008 2009 2010 2011 2012 2013

Labor Input and Productivity

(index, 2009:Q2 = 100)

Labor productivity

(output per hour)

Average weekly hours

Employment

Pre-Great Recession 

Peaks 

While still high, the unemployment rate continued it's 

decline over the last year ...

...in part due to lower rates of labor participation fueled 

by demographic factors and more discouraged workers. 

Since weekly hours are close to pre-recession levels, further 

increases in labor input will require additional job creation.

The share of long-term unemployed remains high. 

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 2013

Unemployed

Unemployment

Rate (RHS;

pct of labor force)

Broad Labor underutilization

(LHS; pct of labor force +

marginally attached

workers)

Measures of Unemployment 

-600

-500

-400

-300

-200

-100

0

100

200

300

Great Recession 

(Jan.2008-June 

2009)

Current Expansion Last 12 Months

Government

Other Services

Education, Health, & Health Care

Other Goods Producing

Manufacturing

Construction

Job Creation by Sector 

... mainly on the back of more jobs in education, 

health, and other service sectors.
UNITED STATES

44 INTERNATIONAL MONETARY FUND

Figure 4. Financial Sector

Sources: Board of Governors of the Federal Reserve System; Bloomberg, L.P.; SNL Financial; Haver Analytics; Thomson Reuters 

LPC; and IMF staff estimates.

40

60

80

100

120

140

2007 2008 2009 2010 2011 2012 2013

Stock Price Indexes

(Index 2007= 100)

S&P 500

Index of Bank 

Share Prices (KBW)

The stock market has rallied since the end of 2012, but 

recently retrenched amid QE "tapering" discussions.

-2

0

2

4

6

8

10

12

2001 2003 2005 2007 2009 2011 2013 2015

Adjusted Earnings Per Share at 18 CCAR Banks1/

(Percent)

1/Bloomberg Survey Forecasts 

Banks' profitability is expected to pick up somewhat but to remain 

below pre-crisis peaks.

35

38

41

44

47

50

50

55

60

65

70

75

2006 2007 2008 2009 2010 2011 2012 2013

Composition of CCAR Institutions' Assets

(Percent of total assets) Risk-Weighted Assets (LHS)

Total Loans (RHS)

Banks have increased loans as a share of assets over the last 

year ...

-75

-50

-25

0

25

50

75

100

2005 2006 2007 2008 2009 2010 2011 2012 2013

Commercial & Industrial

Commercial Real Estate

Residential Real Estate

Consumer Loans

Lending Standards

(Net percentage 

tightening)

... and their lending standards have continued to ease.

0

4

8

12

16

20

2006 2007 2008 2009 2010 2011 2012 2013

Tier 1 Capital Ratios at CCAR Institutions

(Percent of risk-weighted assets)

Strong capital positions suggest banks can support activity 

through lending ...

0

2

4

6

8

10

12

1 3 5 7 9 11 13 6 8 10 12 14 16 18

Tier 1 common capital ratio Total risk-based capital ratio

Distribution of Minimum Capital Ratios Under

CCAR Stress Scenario 

(Number of institutions)

... even under a very stressed economic and financial 

environment.

-1,800

-1,000

-200

600

1,400

2,200

-1,200

-800

-400

0

400

800

1,200

1,600

2005 2008 2011

Corporate Bonds

Bank Loans ex Mortgages

Other Credit Market Instruments

Credit Market Borrowing

and Bond Spreads

Investment Grade

Spread (bps; RHS)

High-Yield

Spread

(bps; RHS)

Credit Market Flows

(Bn dollars, SAAR; LHS)

Corporations have continued to raise funds on attractive 

terms directly from capital markets over the last year ...

-1

0

1

2

3

4

5

2011 2012 2013

Difference in Price Between Covenant-Lite and Other 

Comparable Leveraged Loans

...but the lack of discrimination in price between deals with weak 

covenants and other comparable leveraged loans raises concerns.

Tier 1 

common

capital

TARP preferred 

equity

Non-common Tier 1 

capital, ex. TARP
UNITED STATES

INTERNATIONAL MONETARY FUND 45

Figure 5. Public Finances 

Sources: Congressional Budget Office; Markit; Office of Management and Budget; Bureau of Economic Analysis; Centers 

for Medicare and Medicaid Services; Haver Analytics; and IMF staff estimates.

0

2

4

6

8

10

2011 2013 2015 2017 2019 2021 2023

CBO May 2013 baseline 

President's FY2014 Budget

IMF Projection (July 2013)

Federal Budget Deficit 

(Percent of GDP; fiscal years)

60

70

80

90

100

2011 2013 2015 2017 2019 2021 2023

President's FY2014 Budget

CBO May 2013 Baseline

IMF Projection (July 2013)

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

10 110 210 310 410

10-year government bond yield (pct.)

5-year sovereign CDS spreads (bps)

Government Bond Yields and CDS Spreads

United France

States

Japan

Germany

Italy

The federal budget deficit will temporarily fall as the economy 

recovers and legislated savings kick in ...

... however, projections point to unsustainable debt dynamics 

over the longer term.

The United States remains a safe haven despite medium-term 

fiscal challenges and the high debt level.

Health care spending growth has slowed down, keeping health 

care spending as a share of GDP constant, although such 

slowdowns proved to be only temporary in the past ...

... and health care remains 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

5

10

15

20

1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011

NBER 

recession

Public health care spending

Total health care spending

Health Care Spending

(Percent of GDP)

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

GBR

USA

DNK

SWE

NOR

EA

25

30

35

40

45

50

55

60

65

25 30 35 40 45 50 55 60 65

2007

2012

General Government Revenue

in 2007 and 2012

(Percent of GDP)

Spain

Jun. 2013

Aug. 2011
UNITED STATES

46 INTERNATIONAL MONETARY FUND

Figure 6. State and Local Governments 

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 IMF staff calculations.

-40

-20

0

20

40

-3

-2

-1

0

1

2

3

2000 2002 2004 2006 2008 2010 2012

Net investment (LHS)

Operating balance (LHS)

Net lending (LHS)

Main Indicators

(Percent of GDP) Gross Debt (RHS)

Net Debt (RHS)

7.5

7.8

8.1

8.4

8.7

9.0

9.3

0

6

12

18

24

30

1998 2000 2002 2004 2006 2008 2011 2013

Other

Transport

Utilities

Hospitals

State and Local Government Employment

(Millions, unless noted otherwise)

Education

(LHS)

General Admin.

(LHS)

State and local 

gov't employment

(pct of population; RHS)

-15

-10

-5

0

5

10

15

20

1999 2001 2003 2005 2007 2009 2011 2013

Current tax receipts

Total receipts

Total expenditures

State and Local Government 

Revenues and Expenditures

(Percent change, yoy)

2

4

6

8

10

2007 2008 2009 2010 2011 2012 2013

AAA municipals

BBB municipals

AA municipals

20-Year Treasury

Government Bond Yields

(Yield to maturity; percent)

State and local governments (SLGs) operate under 

balanced budget requirements, which limited debt 

accumulation during the Great Recession.

With the economy gradually recovering and asset 

prices rising, the SLGs have enjoyed strong revenues ...

... but continue to downsize their activities, including in 

education and other social services.

SLG should aim to replenish the “rainy-day” funds 

depleted during the Great Recession to reduce 

vulnerability to revenue shortfalls.

... as reflected in the spreads differences between 

lower-and higher-quality issuers.

Underfunded retirement and health care plans pose 

medium-term fiscal challenges ...

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

0

2

4

6

8

10

12

0 25 75 125 175 225 275 325 375 400

Number of States

Unfunded Liabilities

Unfunded Liabilities

(Percent of of 2011 state tax revenue)
UNITED STATES

INTERNATIONAL MONETARY FUND 47

Figure 7. 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 IMF staff estimates.

-9

-6

-3

0

3

2007 2008 2009 2010 2011 2012 2013

Trade balance

Income balance

Net current transfers

Current acct. balance

U.S. Current Account Balance

(Percent of GDP)

The U.S. current account balance narrowed sligthly 

over the past year, owing to a lower trade deficit.

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

2007 2008 2009 2010 2011 2012 2013

Non-Oil Trade Balance 

Oil Trade Balance 

The decline in the goods and services trade balance 

mainly reflects a lower oil balance.

U.S. Trade Balance

(Percent of GDP) 

75

85

95

105

115

125

135

145

1992 1995 1998 2001 2004 2007 2010 2013

Broad real dollar index

International relative prices (WARP)

Exchange Rates

(Indices, 1990=100)

The REER has been close to its 20-year low while the level of 

U.S. prices relative to main trading partners has been close 

to its 20-year average.

-600

-400

-200

0

200

400

600

800

1,000

2007 2008 2009 2010 2011 2012 2013

FDI

U.S. Treasuries

Other portfolio

Banks

Other

Foreign purchases on U.S. treasuries dominates capital 

inflows.

Capital Inflows

(Billion US$)

-55

-45

-35

-25

-15

-5

5

15

1991 1994 1997 2000 2003 2006 2009 2012

International 

investment position 

1990-2012

Cumulative financial flows, 2000-onwards 

The U.S. international investment position is much 

stronger than implied by cumulative financial flows...

IIP and Cumulative Current Account Balances 

(Percent of GDP) 0 50 100 150 200

Assets

Liabilities

FDI (book value) Portfolio equity Portfolio debt

Reserves Other investment Financial derivatives

U.S. External Assets and Liabilities 

(Percent of GDP)

... partly reflecting the composition of U.S. external portfolio 

(with foreign assets dominated by FDI and equities, and foreign 

liabilities mainly debt securities).
UNITED STATES

48 INTERNATIONAL MONETARY FUND

Annex I. Risk Assessment Matrix

 

Nature/Source of Risk 

Overall Level of Concern 

 

Likelihood of Realization 

(High, Medium, or Low) 

Expected Impact if Risk is Materialized 

(High, Medium, or Low) 

Short-Term Risks 

1. Financial stress in the 

euro area re-emerges 

Medium Medium 

 Renewed financial stress and 

reintensification of bank-sovereign 

links in the Euro area. 

Increased financial stress would shave 

0.75 percent from output in the first year.

2. Housing market 

recovery 

Medium Medium 

Housing recovery unleashes a 

virtuous cycle of higher spending, 

wealth, and easier credit conditions, 

helping to release pent-up demand.

A 5 percent increase in (nominal) house 

prices relative to baseline would add 

0.5–0.6 percent to output after two years. 

A 5 pps increase in housing starts would 

add 0.3 percent to output over two years.

3. Distortions from 

unconventional monetary 

policy (side effects from 

exit modalities) 

High Medium 

Interest rates could increase more 

rapidly than in our baseline scenario 

because of greater concerns on 

financial stability from the low rates 

environment, markets over-reaction 

to initial steps to unwind monetary 

policy accommodation, or an 

inflation scare (though this is more a 

medium term risk). 

The impact of a spike in long term rates 

would depend on its size and persistence. 

A temporary (gradually dissipating after 

2 years) increase of 50 bps in 10-year 

rates could subtract about 0.25 percent 

from output after 2 years. A permanent 

shock would subtract about 0.5 percent. 

4. Failure to raise the debt 

ceiling 

Low High 

The federal borrowing limit is not 

raised due to the political gridlock in 

Congress. 

The economic costs would be potentially 

catastrophic depending on how long the 

impasse lasts; spillovers to the rest of the 

world would be severe. 

Medium-Term Risks 

5. Protracted period of 

slower European growth 

High Low 

Growth in the Euro Area could be 

durably lower due to larger-thanexpected deleveraging or negative 

surprise on potential growth. 

Low growth in the Euro Area would 

reduce U.S. output by 0.2 percent after 

two years. 

6. U.S. bond market stress 

Low High 

Policymakers do not take sufficient 

measures to put the long-term debt 

path on a sustainable trajectory and 

the lack of fiscal sustainability 

triggers a sharp rise in sovereign risk 

premium. 

The impact on the U.S. and the world 

would be significant. A 200bps increase in 

the benchmark Treasury yields in 2015 

would subtract 2.5 pps and 1.5 pps from 

U.S. growth in 2015 and 2016, 

respectively. 
UNITED STATES

INTERNATIONAL MONETARY FUND 49

Annex II. Public Sector Debt Sustainability Analysis (DSA)

1. Since 2011, Congress has legislated about $2.8 trillion in medium-term fiscal 

consolidation measures. 

a. The Budget Control Act enacted in August 2011 capped discretionary spending, 

saving about $900 billion over 10 years relative to the CBO baseline. 

b. Additional savings worth $1.2 trillion over 10 years were triggered by the failure of 

the Congressional Committee on Deficit Reduction in November 2011. These cuts 

took effect in March 2013 through cancellation of budget authority (“sequestration”) 

in FY2013 and they will be executed through caps on appropriation levels in 

FY2014–21. 

c. The American Taxpayer Relief Act signed into law in January 2013 increased the top 

ordinary income tax rate the tax rate on capital gains and dividends, phased out 

personal exemptions, and limited itemized deductions for upper-income taxpayers, 

raising $700 billion over 10 years relative to the CBO alternative baseline. 

2. Despite the substantial legislated savings in the pipeline, U.S. public finances 

remain on an unsustainable trajectory. Under staff’s baseline projection which, in addition to 

these budgetary savings, includes the savings from the drawdown of overseas contingency 

operations and removal of emergency funding for disaster relief, the public debt ratio is put on 

a downward path after 2014. However, the debt ratio starts rising again at the end of the 

decade due to spending pressures from an aging population and excess cost growth in the 

health care sector (even after taking into account the recent cost slowdown). Federal debt held 

by the public is projected to increase from 73 percent of GDP at end-FY2012 to 77 percent of 

GDP in FY2023, with general government gross debt at 109 percent of GDP in CY2022. 

3. The fiscal projections are being substantially improved by a favorable interest 

rate-growth differential. Reflecting 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 about 1 percent of GDP would be appropriate to put the public debt ratio 

firmly on a downward path. As discussed in the April 2013 Fiscal Monitor, the targeted primary 
UNITED STATES

50 INTERNATIONAL MONETARY FUND

surplus would need to be even higher in the long run to bring the debt ratio closer to the precrisis levels by 2030. 

4. The public debt dynamics are highly sensitive to growth and interest rate 

assumptions. The analysis in Annex Figure suggests that the public debt dynamics are highly 

sensitive to growth and interest rate assumptions, primarily reflecting the fact that the general 

government debt ratio already exceeds 100 percent of GDP. 
Annex Table. United States: Public Sector Debt Sustainability Framework, 2008–18 (In percent of GDP, unless otherwise indicated) Projections 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 

Baseline: Public sector debt 1/ 75.5 89.1 98.2 102.4 106.4 109.0 109.9 109.1 108.1 107.2 106.6 

Of which: foreign-currency denominated 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Change in public sector debt 9.1 13.5 9.1 4.2 4.0 2.6 0.9 -0.8 -1.0 -0.9 -0.6 Identified debt-creating flows (4+7+12) 5.5 15.1 7.9 6.3 4.5 2.7 0.3 -1.5 -1.7 -1.6 -1.1 Primary deficit (includes interest receipts) 4.0 10.9 8.6 7.2 5.8 3.1 1.9 1.2 0.9 0.5 0.2 Revenue and grants including interest receipts 32.5 30.8 31.2 31.4 31.6 33.6 34.2 34.9 34.8 34.5 34.5 Primary (noninterest) expenditure 36.5 41.7 39.8 38.6 37.5 36.7 36.1 36.0 35.8 35.0 34.7 Automatic debt dynamics 2/ 1.5 4.2 -0.6 -1.0 -1.3 -0.4 -1.6 -2.7 -2.7 -2.1 -1.3 Contribution from interest rate/growth differential 3/ 1.5 4.2 -0.6 -1.0 -1.3 -0.4 -1.6 -2.7 -2.7 -2.1 -1.3 Of which: contribution from real interest rate 1.3 1.8 1.4 0.7 0.9 1.3 1.2 1.0 1.0 1.4 1.7 Contribution from real GDP growth 0.2 2.4 -2.1 -1.7 -2.2 -1.8 -2.9 -3.6 -3.7 -3.5 -3.0 Contribution from exchange rate depreciation 4/ 0.0 0.0 0.0 0.0 0.0 ... ... ... ... ... ... Other identified debt-creating flows 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Privatization receipts (negative) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Recognition of implicit or contingent liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Federal student loans, incurrence of other gross liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Residual, including asset changes (2-3) 5/ 3.6 -1.5 1.2 -2.0 -0.6 -0.1 0.6 0.7 0.7 0.7 0.5 Public sector debt-to-revenue ratio 1/ 232.4 288.9 314.4 326.2 336.3 324.0 321.2 312.7 310.4 310.8 309.3 Scenario with key variables at their historical averages 7/ 109.0 113.5 118.1 122.7 127.3 131.7 

Scenario with no policy change (constant primary balance) in 2013–2018 109.0 111.0 112.2 113.2 114.8 117.0 Key Macroeconomic and Fiscal Assumptions Underlying Baseline Real GDP growth (in percent) -0.3 -3.1 2.4 1.8 2.2 1.7 2.7 3.5 3.6 3.4 3.0 Average nominal interest rate on public debt (in percent) 9/ 4.2 3.2 3.0 3.0 2.7 2.8 2.8 2.9 3.1 3.5 3.9 Average real interest rate (nominal rate minus change in GDP deflator, in percent) 2.0 2.3 1.7 0.8 0.9 1.3 1.2 1.0 1.1 1.4 1.7 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) 2.2 0.9 1.3 2.1 1.8 1.5 1.6 1.9 2.1 2.1 2.2 Growth of real primary spending (deflated by GDP deflator, in percent) 7.5 10.8 -2.3 -1.1 -0.9 -0.3 1.1 3.2 2.8 1.2 1.9 Primary deficit 4.0 10.9 8.6 7.2 5.8 3.1 1.9 1.2 0.9 0.5 0.2 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. Actual 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 - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = sh

currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar). 4/ The exchange rate contribution is derived from the numerator in footnote 2/ as ae(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. 9/ Derived as nominal interest expenditure divided by previous period debt stock. 8/ 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. 7/ The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP. 8/

INTERNATIONAL MONETARY FUND 51
UNITED STATES

52 INTERNATIONAL MONETARY FUND

Annex Figure. Public Debt Sustainability: Bound Tests 1/ 2/ 

Growth 

shock 117

Baseline 107

40

50

60

70

80

90

100

110

120

130

140

2008 2010 2012 2014 2016 2018

Growth Shock

PB shock 116

Baseline 107

117

40

50

60

70

80

90

100

110

120

130

140

2008 2010 2012 2014 2016 2018

Primary Balance Shock and No Policy 

Change Scenario

Baseline 107

40

50

60

70

80

90

100

110

120

130

140

2008 2010 2012 2014 2016 2018

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 107

40

50

60

70

80

90

100

110

120

130

140

2008 2010 2012 2014 2016 2018

Baseline and Historical Scenarios

115

Baseline 107

40

50

60

70

80

90

100

110

120

130

140

2008 2010 2012 2014 2016 2018

Combined Shock

Combinedshock

Baseline 107

116

40

50

60

70

80

90

100

110

120

130

140

2008 2010 2012 2014 2016 2018

Contingent Liabilities Shock

Contingent 

liabilities shock

No policy

change

Interest 

rate 120

(Public debt in percent of GDP)
 

UNITED STATES 

STAFF REPORT FOR THE 2013 ARTICLE IV 

CONSULTATION—INFORMATIONAL ANNEX

Prepared By The Western Hemisphere Department 

Fund Relations _____________________________________________________________________________ 2 

Statistical Issues ____________________________________________________________________________ 4 

CONTENTS 

July 9, 2013 
UNITED STATES 

2 INTERNATIONAL MONETARY FUND

FUND RELATIONS(AS OF MAY 31, 2013) 

Membership Status: Joined 12/27/45; Article VIII 

 Percent

General Resources Account: SDR Million Quota

Quota 42,122.40 100.00 

Fund holdings of currency 28,794.68 68.36 

Reserve position in Fund 13,326.97 31.64 

Lending to the Fund 

 New Arrangements to Borrow 8,524.09 

 Percent

SDR Department: SDR Million Allocation

Net cumulative allocation 35,315.68 100.00 

Holdings 35,826.28 101.45 

Outstanding Purchases and Loans: None 

Financial Arrangements: None 

Projected Payments to the Fund: 

(SDR Million; based on existing use of resources and present holdings of SDRs):

Forthcoming 

2013 2014 2015 2016 2017

Principal 

Charges/Interest 0.20 0.20 0.20 0.20

Total 0.20 0.20 0.20 0.20

Exchange Rate Arrangements: The exchange rate of the U.S. dollar floats independently and is 

determined freely in the foreign exchange market. 

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 
UNITED STATES 

INTERNATIONAL MONETARY FUND 3

individuals. The United States administers sanctions programs relating to, inter alia, Burma, Cuba, 

Iran, North Korea, and Sudan. 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 entities whose activities 

have been determined to threaten the national security, 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. 

Article IV Consultation. The 2012 Article IV consultation was concluded in July 2012 and the Staff 

Report was published as IMF Country Report No. 12/213. 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 2013 Article IV discussions were conducted from May 6–May 17, 2013. Concluding meetings 

with Chairman Bernanke of the Board of Governors of the Federal Reserve System, and Treasury 

Secretary Lew occurred on May 31st and June 12th, respectively. The Managing Director, Ms. Lagarde, 

and WHD Director, Mr. Werner, participated in the concluding meetings. A press conference on the 

consultation was held on June 14th, 2013. The team comprised Gian Maria Milesi-Ferretti (head), 

Roberto Cardarelli, Martin Sommer, Francesco Columba, Gabriel Di Bella, Madelyn Estrada, Deniz 

Igan, and Jarkko Turunen (all WHD); Chris Papageorgiou (SPR); Rebecca McCaughrin (MCM); and, 

Tao Wu (ICD), with contributions from Steve Dawe and Emmanuel Mathias (LEG); Marshall Mills, 

Katrin Elborgh-Woytek, Lars Engstrom, and Michele Ruta (SPR). Ms. Lundsager (Executive Director) 

and Mr. Weiss (Advisor) attended some of the meetings. Outreach included discussions with 

Congressional staff 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. 
UNITED STATES 

4 INTERNATIONAL MONETARY FUND

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 27, 2013) 

 Date of 

latest 

observation

Date 

received 

Frequency 

of data1

Frequency of 

reporting1

Frequency of 

publication1

Exchange rates June 21 June 24 D W W

International reserve assets and reserve 

liabilities of the monetary authorities2

June 26 June 27 W W W

Reserve/base money June 26 June 27 B W W

Broad money June 13 June 21 W W W

Central bank balance sheet June 26 June 27 W W W

Interest rates3

 same day same day D D D

Consumer price index May 2013 June 18 M M M

Revenue, expenditure, balance and 

composition of financing4

—general 

government5

2013 Q1 May 31 Q Q Q

Revenue, expenditure, balance and 

composition of financing4

—central 

government 

May 2013 June 12 M M M

Stocks of central government and central 

government-guaranteed debt 

May 2013 June 6 M M M

External current account balance 2013 Q1 June 14 Q Q Q

Exports and imports of goods and 

services 

Apr. 2013 June 4 M M M

GDP/GNP (3rd release) 2013 Q1 June 26 Q M M

Gross External Debt 2012 Q4 March 29 Q Q Q

International Investment Position6

 2012 June 25 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. 
Statement by the IMF Staff Representative on the United States 

July 24, 2013 

1. This note reports on information that has become available since the staff report 

(SM/13/197) was issued and does not alter the thrust of the staff appraisal.

2. Recent indicators point to a sharper than expected slowdown in economic 

activity in the second quarter. This reflects weakness in inventory accumulation and net 

exports as well as slower private consumption growth, as suggested by retail sales in June. 

On a positive note, recent housing indicators (such as the homebuilders' survey) remain 

relatively upbeat, despite the recent rise in mortgage rates, which has slowed refinancing 

activity. Headline inflation picked up to 1.8 percent (y/y) in June, mainly due to an increase 

in gasoline prices, while core inflation inched down to 1.6 percent. 

3. U.S. and global financial markets have somewhat stabilized after the correction 

in June. In the United States, financial conditions have improved since early July, with 

slightly lower long-term Treasury yields and mortgage rates, narrower risk spreads, higher 

stock prices, a weaker dollar against most major currencies, and lower volatility. However, 

trading liquidity remains low across a number of markets and outflows from long-term U.S. 

and emerging market bond funds have continued, albeit at a slower pace. Global equity 

markets have partly recovered the losses experienced since late May (on July 18, the MSCI 

for emerging markets was still about 10 percent down relative to May), while emerging 

market domestic government bond yields and external bond spreads have declined from their 

peak in June. Second-quarter earnings for major U.S. financial institutions were mostly 

above expectations, mainly driven by higher trading and investment banking revenues. In his 

testimony to the House of Representatives on July 17, Chairman Bernanke appropriately 

reiterated that the pace of asset purchases depends on the performance of the economy, and 

that the current pace could be maintained for longer if financial conditions were judged to be 

insufficiently accommodative. 

4. The Mid-Session Review (MSR) released by the Office of Budget and 

Management (OMB) on July 8 confirms the progress in deficit reduction. OMB’s 

projection of the federal deficit for FY2013 is now 4.7 percent of GDP, well below the 

projection in the President’s Budget (6 percent), reflecting stronger-than-expected revenues, 

a one-off payment from Fannie Mae and Freddie Mac,1

 and the fact that the sequester is now 

assumed to remain in place through FY2013. Growth projections were revised down (and are 

 

1

 The two companies had written down the value of deferred tax assets during the crisis, given the bleak outlook 

for the housing market. In May 2013, they decided to reverse the write-downs as they returned to profitability. 

This boosted the net worth of the companies and increased the dividends payable to the Treasury under the 

bailout agreement. These payments (of about $85 billion) are included in the budget on a cash basis, but are not 

included in staff’s estimates of the fiscal deficit which are on an accrual basis, in line with GFSM 2001. 
2 

now closer to staff projections), and this slightly increases the projected deficits in the outer 

years. 

5. More progress was achieved on the financial reform agenda. On July 8 the 

Financial Stability Oversight Council (FSOC) designated two non-bank financial institutions, 

American International Group (AIG), and GE Capital, as systemically important. Prudential 

Financial has appealed the proposed designation by the FSOC. Markets’ reaction to the 

designations has been fairly muted, with shares of the designated firms generally rising in 

line with the broader equity market. On July 9, The Federal Reserve Board, the Federal 

Deposit Insurance Corporation, and the Office of the Comptroller of the Currency issued a 

notice of proposed rulemaking that would introduce an enhanced supplementary leverage 

ratio of 6 percent for the largest 8 U.S. banks. On July 11, the Commodity Futures Trading 

Commission and European Union regulators announced an agreement on derivative 

regulations which seeks to harmonize cross-border rules, by allowing swap market dealers 

and participants to be subject only to the relevant rules of domestic authorities. 

6. The Bureau of Economic Analysis (BEA) is scheduled to release a 

comprehensive revision to the national income and product accounts on July 31st, 

together with the first estimate of GDP growth in the second quarter of 2013. 
Press Release No. 13/277

FOR IMMEDIATE RELEASE 

July 26, 2013

IMF Executive Board Concludes 2013 Article IV Consultation with the United States

On July, 24, 2013, the Executive Board of the International Monetary Fund (IMF) concluded 

the Article IV consultation with the United States.

1

The U.S. recovery has remained tepid, with GDP growing at a modest 2.2 percent in 2012, 

reflected legacy effects from the financial crisis, budget deficit reduction, a weak external 

environment, and temporary effects of extreme weather-related events.

While policymakers in Congress averted the fiscal cliff at the beginning of 2013, the 

expiration of the payroll tax cut and implementation of across-the-board spending cuts 

(“sequester”) are weighing significantly on growth this year, with growth in the first quarter 

of 2013 at 1.8 percent and indicators suggesting slower growth in the second quarter. 

Despite these powerful headwinds, the nature of the recovery appears to be changing. In 

particular, equity valuations have soared in 2013 and house prices have increased by more 

than 10 percent over the last 12 months, strengthening household balance sheets and 

supporting private demand. At the same time, residential construction has accelerated and 

labor market conditions have improved. To a large extent this owes to very easy financial 

conditions, with the Fed continuing to add monetary policy accommodation over the past 

year. Financial conditions have somewhat tightened since mid-May 2013, after the Fed 

indicated that its asset purchases could be scaled back later in the year, but still remain 

extremely accommodative. While the rapid pace of fiscal consolidation is expected to keep 

growth subdued at 1.7 percent in 2013, we expect economic activity to accelerate to 

2.7 percent next year as the fiscal drag subsides and the negative legacies of the financial 

crisis wane further. The unemployment rate is expected to remain broadly stable in 2013, 

reflecting the pickup in the labor force participation as discouraged workers return to the 

labor force, and to gradually fall in 2014. Inflation is expected to pick up somewhat but to 

 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. An explanation of any qualifiers used in summing ups can be found 

here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

International Monetary Fund

Washington, D.C. 20431 USA
2

remain below the Fed long-run objective of 2 percent, given the lingering slack in the 

economy. 

The risks to the outlook appear modestly tilted to the downside. Economic activity could be

lower than in our baseline scenario in the presence of a stronger-than-projected impact of 

fiscal consolidation, a faster-than-expected increase in interest rates, a weaker external 

environment, or higher structural unemployment. In contrast, the recovery could be stronger 

than we anticipate if the rebound of the housing market were to ignite a positive feedback 

loop between higher house prices, easier mortgage conditions, and stronger consumption and 

investment.

With regard to policy actions, the Federal Reserve has appropriately indicated that it intends 

to maintain a high degree of monetary policy accommodation for a considerable time after 

the economy strengthens, and that the pace and composition of its asset purchases will 

depend on the evolution of economic conditions. The administration’s budget proposal 

envisages a gradual reduction in the budget deficit so as to put the public debt ratio on a 

downward path, although political gridlock in Congress makes prospects for legislative 

action unclear. U.S. banks’ health has improved significantly over the past 12 months, but 

there are a few signs of emerging vulnerabilities in the financial sector from persistently low 

interest rates. Further progress was made on strengthening financial regulation, including 

introducing rules that adopt Basel III capital standards, designating two systemicallyimportant nonbank financial institutions, and proposing a reform of the money market mutual 

funds industry.

Executive Board Assessment

Executive Directors welcomed the improvement in the underlying conditions of the 

U.S. economy, which bodes well for a gradual acceleration of growth, while noting that the 

balance of risks to the outlook remains tilted to the downside.

Directors generally concurred that the fiscal deficit reduction in 2013 is excessively rapid, 

and that the automatic spending cuts (“the sequester”) not only reduce growth in the short 

term but could also lower medium-term potential growth. They stressed the importance of 

adopting a comprehensive and back-loaded medium-term plan entailing lower growth in 

entitlement spending and higher revenues. Together with a slower pace of deficit reduction in 

the short run, this fiscal strategy would help sustain global growth, place the U.S. fiscal 

position on a sustainable path over the medium term, and support the reduction of global 

imbalances. In this context, a few Directors also expressed concerns regarding the budgetary 

process and saw room for improvement. 

Directors broadly agreed that accommodative monetary policy continues to provide essential 

support to the recovery, but cautioned that its financial stability implications should be 
3

carefully assessed. They considered that a long period of exceptionally low interest rates 

could potentially entail unintended consequences for domestic financial stability and has 

complicated the macro-policy environment in some emerging markets. In this context, 

Directors stressed that strong macro-prudential oversight and supervision of the financial 

system remain essential.

Directors noted that the Federal Reserve has a range of tools to manage the normalization of 

monetary policy, but that there are significant challenges involved in unwinding 

accommodation, including risks of market reactions leading to excessive interest rate 

volatility that could have adverse global implications. They stressed that effective 

communication on the exit strategy and a careful calibration of its timing will be critical for 

reducing these risks.

Directors welcomed the recent improvements in the housing and labor markets. They agreed 

that the rebound of the housing market has benefited from monetary policy actions and 

government-backed programs that facilitated refinancing and modification of loans under 

stress. They saw room for policies that continue to support the housing market while 

gradually reducing the dominant role of the government-sponsored enterprises. Directors also 

agreed that the decline in labor force participation and high levels of long-term 

unemployment suggest room for active labor market policies to complement efforts to boost 

domestic demand.

Directors noted that while the U.S. banking system is healthier than last year, emerging 

vulnerabilities and risks from persistently low rates in the financial sector need to be 

carefully monitored. Directors welcomed the strengthening of the regulatory architecture 

relative to the pre-crisis period, including through the adoption of Basel III capital rules. 

They emphasized that completing the implementation of the financial reform agenda remains 

essential to increase the resilience of the U.S. financial system, while at the same time 

reducing the risk of regulatory fragmentation at the international level and minimizing 

negative spillovers.

Directors noted that while the current account deficit has declined, the U.S. external position 

remains weaker than justified by fundamentals and desirable policies. A gradual but 

sustained reduction in the fiscal deficit, together with a strengthening of growth in partner 

countries, would help achieve the desirable strengthening of the current account.
4

United States: Selected Economic Indicators

(Annual change in percent, unless otherwise indicated)

Projections

2008 2009 2010 2011 2012 2013 2014

National production and income

 Real GDP -0.3 -3.1 2.4 1.8 2.2 1.7 2.7

 Net exports 1/ 1.2 1.1 -0.5 0.1 0.0 0.1 -0.4

 Total domestic demand -1.5 -4.0 2.8 1.7 2.1 1.6 3.0

 Final domestic demand -1.0 -3.3 1.3 1.8 2.0 1.5 3.0

 Private final consumption -0.6 -1.9 1.8 2.5 1.9 2.1 2.4

 Public consumption expenditure 2.2 4.3 0.9 -2.3 -1.3 -3.5 0.4

 Gross fixed domestic investment -5.1 -15.3 -0.3 3.4 6.1 4.3 7.8

 Private fixed investment -7.1 -19.0 -0.2 6.6 8.7 6.3 8.9

 Residential structures -23.9 -22.4 -3.7 -1.4 12.1 15.1 16.7

 Public fixed investment 4.6 0.6 -0.6 -7.3 -4.0 -4.4 2.6

 Change in private inventories 1/ -0.5 -0.8 1.5 -0.2 0.1 0.1 0.1

 GDP in current prices 1.9 -2.2 3.8 4.0 4.0 3.2 4.4

Employment and inflation

 Unemployment rate 5.8 9.3 9.6 8.9 8.1 7.6 7.3

 CPI inflation 3.8 -0.3 1.6 3.1 2.1 1.7 1.8

 GDP deflator 2.2 0.9 1.3 2.1 1.8 1.5 1.6

Government finances

 Federal government (budget, fiscal years)

 Federal balance (percent of GDP) -3.2 -11.5 -9.7 -9.0 -6.9 -4.6 -3.4

 Debt held by the public (percent of GDP) 40.5 54.0 62.9 67.8 72.6 75.6 76.6

 General government (GFSM 2001, calendar years)

 Net lending (percent of GDP) -6.7 -13.3 -11.1 -10.0 -8.5 -5.9 -4.8

 Structural balance (percent of potential nominal GDP) -5.2 -8.2 -8.5 -7.7 -6.4 -3.9 -3.2

 Gross debt (percent of GDP) 75.5 89.1 98.2 102.4 106.4 108.9 109.8

Interest rates (percent)

 Three-month Treasury bill rate 1.4 0.2 0.1 0.1 0.1 0.1 0.1

 Ten-year government bond rate 3.7 3.3 3.2 2.8 1.8 2.2 2.7

Balance of payments

 Current account balance (billions of dollars) -681 -382 -449 -458 -440 -476 -541

 Percent of GDP -4.8 -2.7 -3.1 -3.0 -2.8 -2.9 -3.2

 Merchandise trade balance (billions of dollars) -834 -511 -650 -744 -741 -715 -787

 Percent of GDP -5.8 -3.7 -4.5 -4.9 -4.7 -4.4 -4.7

 Balance on invisibles (billions of dollars) 153 129 201 286 301 239 0

 Percent of GDP 1.1 0.9 1.4 1.9 1.9 1.5 0.0

Saving and investment (percent of GDP)

 Gross national saving 13.4 11.1 12.2 12.2 13.4 13.7 14.4

 Gross domestic investment 18.1 14.7 15.5 15.5 16.2 16.6 17.6

 Sources: IMF staff estimates.

 1/ Contribution to real GDP growth, percentage points.