IMF Cuts U.S. Growth Estimates

IMF Cuts U.S. Growth Estimates on Weak Consumer Spending

By Timothy R. Homan -

Consumer spending, which accounts for about 70 percent of the U.S. economy, will be hampered by unemployment, a desire to save more, tight credit and the deterioration in household wealth following the plunge in home prices, according to an IMF report. Photographer: Tim Boyle/Bloomberg

The International Monetary Fund lowered its forecast for U.S. growth this year and 2011, predicting a “slow” rebound restrained by a lack of consumer spending.

The world’s largest economy will grow 2.6 percent this year, down from the 3.3 percent projected in July, the IMF said today in its World Economic Outlook report. Growth will slow to 2.3 percent in 2011, compared with a previous estimate of 2.9 percent, according to the Washington-based lender, which rescued economies from Iceland to Pakistan during the financial crisis.

“The most likely prospect for the U.S. economy is for a continued but slow recovery, with growth far weaker than in previous recoveries,” the IMF said in the report. “Much of the weakness of this recovery is due to sluggish personal consumption.”

Consumer spending, which accounts for about 70 percent of the U.S. economy, will be hampered by unemployment, a desire to save more, tight credit and the deterioration in household wealth following the plunge in home prices, according to the report. In contrast, the report said, business spending on equipment and software has “rebounded strongly.”

“In the near term, fixed investment is likely to be the principal driver of domestic demand as inventory accumulation slows,” the IMF said. Business investment rose at a 25 percent pace in April through June, the most since 1983, according to the U.S. Commerce Department.

More Unemployment

The jobless rate in the U.S. will average 9.7 percent this year and 9.6 percent in 2011, the IMF said. In April, the fund estimated unemployment would average 8.3 percent next year. The rate was 9.6 percent in August, according to Labor Department data.

The IMF reiterated policy recommendations from its previous report, urging steps to rein in an expanding budget deficit that risks pushing up global borrowing costs. “Market nervousness about the fiscal position of the United States could cause an international increase in interest rates,” the fund said. The IMF also said “the groundwork for fiscal consolidation must begin in 2011.”

One approach to reducing government expenditures is to reform entitlement spending because that would not have an immediate impact on demand, the IMF said without mentioning specific programs.

The fund also said real estate markets in the U.S. remain “fragile” and inflation will remain low, with consumer prices climbing 1.4 percent this year and 1 percent in 2011.

The IMF also said it supported the Federal Reserve’s decision to reinvest proceeds from maturing mortgage holdings into government debt. Should downside risks materialize, a resumption of large-scale asset purchases may be one of the tools policy makers should consider, the IMF said.