Monday, June 16, 2014

US: IMF's Lagarde Says Economy Will Not Reach Full Employment Until 2017, Forecast for 2014 is Only 2%

According to The Associated Press, the US economy is poised to accelerate after a dismal start to the year even though the job market won't return to full employment until 2017.

The IMF noted that steady job gains and other recent data suggest that the economy is rebounding. Employers have added 200,000-plus jobs for four straight months, and the unemployment rate has fallen to 6.3 percent. Auto sales and factory activity are increasing.

Yet growth in 2014 won't likely top last year's lackluster performance, the IMF says. The Washington-based organization foresees the economy growing at a modest 2% in 2014, below its previous estimate of 2.7%. That would be nearly identical to the 1.9% growth in 2013.

The IMF blames the lingering aftermath of the brutal winters and a sluggish recovery in home sales. Years of disappointing growth mean the economy might not reach full employment until 2017.

COMMENT: The IMF cautions that US wages remain stagnant and the rate of long-term unemployment high. As a result, it urged lawmakers to lift the minimum wage and increase the Earned Income Tax Credit for those with low wages.

The IMF projects that growth will reach 3% in 2015, roughly matching the United States' average rate of expansion between 1948 and 2007. But even the 2015 estimate was a downward revision from the IMF's previous forecast that growth next year would be 3.5%.

The IMF also highlighted the challenge for the Federal Reserve to properly time the unwinding of its policies to spur borrowing, investment and spending.

Lagarde also suggested that Fed Chair Janet Yellen should increase the number of news conferences she holds to up to six a year from the current four. Yellen is scheduled to hold one of her quarterly news conferences on Wednesday (June 18).

Because the IMF projects that the United States won't reach full employment until 2017 and that inflation pressures will stay tame, it thinks the Fed might consider keeping rates near historic lows longer than some market analysts expect.

Lagarde declined to take a stance on the dispute over payments for natural gas that Ukraine owes Russia. The two countries, embroiled in a broader territorial struggle, missed a Monday deadline to reach an agreement on payments. As a result, the Russian company Gazprom has cut off gas supplies to Ukraine.