|
The following OECD assessment and recommendations summarise Chapter 1 of the Economic Survey of the United States 2005 published on 27 October 2005.
What is the near-term outlook?
The economic upswing that began in late 2001 has continued at a solid pace, driven by domestic demand that has seemingly been little restrained thus far by energy price or interest rate increases. Rapid productivity growth and high corporate profits have contributed to strong business investment, thereby eventually raising employment and, in turn, underpinning household spending. At the same time, net exports have remained a drag on growth and the external deficit has kept widening. With resource slack diminishing and unit labour costs picking up, core inflation has moved higher. Although some stimulus has been removed, monetary tightening has been blunted by surprisingly low long term interest rates, and further interest rate increases are probably needed to prevent any further increase in underlying inflation. Government finances have improved thanks to unexpected buoyancy of revenues, which has outweighed additional spending, but the fiscal stance has turned only slightly restrictive. The near term outlook is favourable: the macroeconomic effects of Hurricane Katrina are expected to be transitory; and the fundamental factors that have supported activity so far should carry forward to 2006, sustaining a continued expansion roughly in line with estimated potential output growth of 3¼ per cent per year.
There are a number of risks to this scenario, even if a soft landing of the economy would still appear to be the most likely outcome, though a proper assessment of the impact of Katrina is still subject to substantial uncertainty. Yet it would seem that, with little economic slack left, inflation could continue to pick up, in particular if energy prices keep rising; this would surprise financial markets, which for the moment foresee only modest future short-term interest rate increases on the horizon. Stalling budget consolidation or dollar weakness resulting from renewed concerns about the external deficit might also add to inflationary pressures. And the huge expansion in household borrowing and investor leveraging over time might prove to have been excessive, with defaults surfacing quite suddenly. The policy choices facing the Federal Reserve might then be less favourable. For any attempt to protect the economy from a slowdown in activity might only serve to add extra support to housing and other asset prices. Conversely, a house price correction could entail a sharp deceleration in household expenditure, since such wealth is so widely held.
How can good economic performance be sustained?
The longer term outlook looks auspicious, given the remarkable resilience and adjustment capacity the economy has shown. Nonetheless, there are a number of reasons for concern. The lack of domestic saving probably reflects in part policy-induced disincentives to household saving in addition to the large federal budget deficit. The lower level of national saving tends to restrain growth in the domestically owned capital stock and therefore reduces national income in the long run below what it would otherwise be. It also contributes to the large and growing current account deficit. Early attention by policymakers could avoid the need for more radical measures down the road. In addition, reforms in some structural policy areas would seem desirable. Chances for a sustained expansion and continued good economic performance would be enhanced by:
-
Ensuring fiscal sustainability through spending discipline and entitlement and tax reform (Chapter 2).
-
Improving fiscal relations between levels of government by revamping grant and tax systems as well as reconsidering sub national fiscal rules (Chapter 3).
-
Facilitating eventual external adjustment by appropriate macro and micro policy initiatives to boost saving and enhance the economy’s ability to shift smoothly towards tradable goods and services (Chapter 4).
-
Addressing problems in the labour market, such as those faced by workers subject to trade displacement and broader structural adjustment, as well as the decline in labour force participation (Chapter 5).
-
Dealing with energy and environmental issues, notably promoting electricity market liberalisation and curbing rising greenhouse gas emissions (Chapter 6).
These challenges are discussed in some detail in this Survey. This does not mean, however, that there are not other areas that need attention and where reform efforts or policy changes should be considered. Clearly the most important among these is health care, which was treated in depth in the 2002 Survey but which still requires further attention. The education system, some aspects of which are covered, will also need more comprehensive treatment in future Surveys.
___________________________
Return to the Economic Survey of the United States 2005
A printer-friendly Policy Brief (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
To access the full version of the OECD Economic Survey of the United States:
-
Readers at subscribing institutions can go to SourceOECD, our online library.
-
Non-subscribers can purchase the PDF e-book and/or printed book at our Online Bookshop.
-
Government officials can go to OLISnet's Publication Locator.
-
For further information please contact the United States Desk at the OECD Economics Department at webmaster@oecd.org. The OECD Secretariat's report was prepared by Hannes Suppanz and Thomas Laubach under the supervision of Peter Jarrett.
_______________________
|
