The Economy

U.S. Economy to Grow Just 2.2% in 2016, IMF Says

The Fund reduces its forecast from 2.4% in April and says there is a "clear case" for the Fed to proceed cautiously on interest rates.
Katie Kuehner-HebertJune 23, 2016

The International Monetary Fund has lowered its growth forecast for the U.S. economy, citing the strong dollar and the slowdown in corporate investment.

The fund is now predicting growth of 2.2% this year, down from 2.4% in April, while its 2.5% growth forecast for 2017 remains unchanged.

“The past few quarters have been characterized by a deceleration that is attributable to a continued contraction in energy sector investment; weak non-energy, non-residential investment; and a persistent drag from net exports (linked to weaker global growth and the strength of the U.S. dollar),” the IMF said in a statement Wednesday, adding that consumer demand has also slowed.

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The IMF said the U.S. faces potentially “significant longer-term challenges to strong and sustained growth” and that “concerted policy actions are warranted, sooner rather than later.”

The statement pointed to positive signs such as the creation of 2.4 million new jobs over the past year and the decline in unemployment to 4.7%, its lowest level since the eve of the Great Recession. “Inflation remains contained, and the U.S. economy has repeatedly demonstrated its resilience in the face of financial market volatility, a strengthening dollar, and subdued global demand,” it said.

But at this point in the cycle, the IMF said, there is “a clear case” that the Federal Reserve should proceed along “a very gradual upward path” of interest rate increases, “conscious of global disinflationary trends and confirming along the way that wage and price inflation are indeed maintaining their steady upward momentum.”

Since hiking rates in December, the Fed has deferred another increase, with the disappointing May jobs report adding to its hesitancy.

To stimulate U.S. growth, the Fund recommended that Washington overhaul the tax code, boost public investment in infrastructure system, raise the minimum wage to aid the poor and revamp costly entitlement programs.

“Labor’s share of income is around 5 percent lower today than it was 15 years ago, the middle class has shrunk to its smallest size in the last 30 years, the income and wealth distribution are increasingly polarized, and poverty has risen,” the IMF noted.

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