IMF Predicts Slower U.S. Growth on Debt Concerns, Confidence

The International Monetary Fund lowered its forecast for U.S. growth this year and in 2012, citing unresolved debt-reduction concerns and waning confidence among consumers and businesses.

The world’s largest economy will expand 1.5 percent this year, down from the 2.5 percent projected in June, the Washington-based lender said today in its World Economic Outlook report. Unemployment will average 9 percent or higher through next year, the IMF said.

Declining sentiment among Americans and a stagnant labor market threaten household spending, the biggest part of the U.S. economy. The pace of job growth puts pressure on President Barack Obama, lawmakers and the Federal Reserve to take steps to increase payrolls.

“Bold political commitment to put in place a medium-term debt reduction plan is imperative to avoid a sudden collapse of market confidence that could seriously disrupt global stability,” the IMF said in the report. “Downside risks weigh on the outlook given fiscal uncertainty, weakness in the housing market and household finances, renewed financial stress, and subdued consumer and business sentiment.”

Obama yesterday called for $1.5 trillion in tax increases over the next decade to help trim the deficit, saying U.S. prosperity depends on paying down the federal debt.

Spending Cuts

In combination with cuts in spending, Obama said, his plan would reduce the long-term deficit by $3 trillion beyond the $1 trillion that was agreed to as part of a deal to raise the U.S. debt ceiling. The additional taxes largely would fall on the wealthiest Americans, drawing criticism from Republican lawmakers who are opposed to raising taxes.

“The first priority for the U.S. authorities is to commit to a credible fiscal policy agenda that places public debt on a sustainable track over the medium term, while supporting the near-term recovery,” the IMF said. “The fiscal consolidation plan should be based on realistic macroeconomic assumptions and should comprise entitlement reform and revenue-raising measures.”

The fund suggested measures such as gradually closing loopholes and overhauling tax deductions.

The jobless rate in the U.S. will average 9.1 percent this year and 9 percent in 2012, the IMF said in the report. Unemployment was 9.1 percent in August, according to U.S. Labor Department data.

Also weighing on the recovery is the housing market, which precipitated the recession that began in December 2007 and ended in June 2009. The IMF said the industry may take longer to stabilize as home-price declines persist.

‘Loss of Confidence’

“There’s just a risk that if there’s a shock and a loss of confidence then the economy could enter a very mild recession,” said John Herrmann, a senior fixed-income strategist at State Street Global Markets LLC. “So far, consumers have been very cautious.”

U.S. consumer confidence held earlier this month at the second-lowest level of 2011 as the most households in three years said it was a bad time to spend. The Bloomberg Consumer Comfort Index was minus 49.3 in the period to Sept. 11, near this year’s low of minus 49.4 reached in May. The buying climate gauge slumped to the lowest level since October 2008.

The U.S. economy will grow 1.8 percent next year, compared with the 2.7 percent forecast issued three months ago, according to today’s IMF report. GDP will expand 1.6 percent this year and 2.2 percent in 2012, according to the median estimate of 63 economists surveyed by Bloomberg News from Sept. 2 to Sept. 7.

U.S. consumer prices will climb 3 percent this year before rising 1.2 percent in 2012, according to the IMF report. The cost of living in the U.S. increased 3.8 percent in the 12 months through August, according to the Labor Department in Washington.

The economy may improve during the second half of this year, the IMF said, if “financial stability and consumer and business confidence are restored sooner than anticipated.”

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.