June 15, 2013

IMF has dim view of U.S. economy

The IMF cites higher tax rates and the spending cuts from the federal budget sequester.


WASHINGTON - The International Monetary Fund on Friday gave voice to a somewhat pessimistic view of the U.S. economy, as the international organization again called for the United States to end the budget sequester.

Risks to the U.S. economic outlook "appear modestly tilted to the downside," the IMF said Friday as part of an annual review into each member country's finances.

The IMF is projecting 1.9 percent growth this year and 2.7 percent growth in 2014, down from a previous estimate of 3 percent growth next year. That puts the IMF right in the ballpark of Wall Street economists, who are forecasting 1.9 percent growth this year and 2.6 percent growth next year, according to Blue Chip Economic Indicators.

The IMF said higher tax rates and the spending cuts from the federal budget sequester "might prove to be a stronger headwind to consumer demand over the next few quarters."

A slower pace of growth could in turn delay the normalization of the labor market.

"The IMF's advice is to slow down, but hurry up: meaning slow the fiscal adjustment this year -- which would help sustain growth and job creation -- but hurry up with putting in place a medium-term road map to restore long-run fiscal sustainability," managing director Christine Lagarde said in prepared remarks.

Consumer demand this year has been fairly resilient. In May, retail sales grew 0.6 percent, a faster rate than economists had anticipated. But consumer sentiment dropped in June.

The IMF also is concerned about a reappearance of financial stress in the euro area, which could impact the United States through both trade and financial channels, and from the impact of lower growth in a number of emerging-market countries.

The IMF said there's no reason for the Federal Reserve to rush to exit from accommodation, while saying the central bank should do so in a "gradual and orderly" way. The volatility the IMF fears was demonstrated recently when Fed chief Ben Bernanke warned in front of Congress that the central bank may start to reduce the rate of bond purchases this autumn.

Mortgage rates have since jumped by a half-percentage point, though U.S. equity markets aren't down much from the time of the Bernanke warning.


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