UNITED STATES - OECD

1 3. DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIESOECD economic OUTLOOK, VOLUME 2018 ISSUE1 PRELIMINARY VERSION OECD 2018236 UNITED STATESE conomic growth is strengthening to about 3% largely due to a substantial fiscalboost. Employment growth remains robust which, coupled with buoyant asset pricesand strong consumer confidence, is sustaining income and consumption investment is projected to strengthen as a result of major tax reform andsupportive financial conditions. A pick-up in the world economy is underpinning exportgrowth, although tensions have emerged on how best to reduce barriers to policy is set to loosen substantially. As spending appropriations aredetermined, they should prioritise boosting the productive capacity of the economy,such as by supporting infrastructure investment.

2 Fiscal policy combined with structuralpolicies can also help those on the margins of the labour force into employment. Asmacroeconomic policy rebalances, the projected gradual withdrawal of monetaryaccommodation is needed to ensure that inflation returns to target and inflationexpectations rise to their historical norms. Heightened risks in the non-financialcorporate sector have policy is fuelling the expansionThe expansion is now one of the longest on record, though it has been relatively weakin comparison with the past. Jobs have been created at a healthy pace, but, in comparisonwith many other OECD countries employment remains relatively low as a share of theworking age population.

3 Productivity growth has been weak since the start of theexpansion, which has been a feature across the growth coupled with buoyant asset prices, consumer confidence and the effects ofthe tax reforms are supporting strong consumption growth. The fiscal boost shouldincrease labour force participation and push down unemployment rates further. Wagegrowth remains lacklustre notwithstanding unemployment rates falling below estimatesof the structural rate, even as other indicators of labour market slack suggest limited spareUnited StatesSource:OECD economic Outlook 103 2 5051020102012201420162018Y o y % changes UNITED StatesEuro AreaOECDT otal fixed investmentInvestment is strengthening 3 2 10123456789102010201220142016Y o y % changes % of labour force Employment Unemployment rate The labour market is tightening3.

4 DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIESOECD economic OUTLOOK, VOLUME 2018 ISSUE1 PRELIMINARY VERSION OECD 2018237 UNITED STATES :Demand, output and prices1 2 prices USD billionGDP at market prices17 Private consumption11 Government consumption2 Gross fixed capital formation3 Final domestic demand17 Stockbuilding1 Total domestic demand17 Exports of goods and services2 Imports of goods and services2 Net exports1- Memorandum itemsGDP deflator Personal consumption expenditures deflator Core personal

5 Consumption expenditures deflator2 Unemployment rate (% of labour force) Household saving ratio, net (% of disposable income) General government financial balance (% of GDP) General government gross debt (% of GDP) Current account balance (% of GDP) 1. Contributions to changes in real GDP, actual amount in the first column. 2. Deflator for private consumption excluding food and energy. Source: OECD economic Outlook 103 database. Percentage changes, volume(2009 prices) UNITED States1. General government shows the consolidated ( with intra-government amounts netted out) accounts for all levels of government(central plus State/local) based on OECD national accounts.

6 This measure differs from the federal debt held by the public, which of GDP for the 2017 fiscal Personal Consumption Expenditures price :OECD economic Outlook 103 2 pts % of GDP Change in the underlying primary balance General government net debt Fiscal policy is loosening0246 1012345620102012201420162018 Y o y % changesWage ratesPCE Inflation is picking up3. DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIESOECD economic OUTLOOK, VOLUME 2018 ISSUE1 PRELIMINARY VERSION OECD 2018238capacity.

7 However, underlying demographic trends suggest labour force growth willeventually decelerate, although the effect on household income will be offset by strongerwage growth in a tight labour market. Investment began to recover in 2017, driven bysurging investment in oil and gas exploration and production as the oil price rose. Asinvestment in the oil and gas sector stabilises, the impact of December's tax reform willsustain healthy business investment in the near to sustain the expansionMacroeconomic policy is rebalancing with fiscal policy set to loosen substantially overthe next two years. Tax reform and increases in spending will see the general governmentdeficit rise by around 2 percentage points of GDP during the projection, pushing upgovernment debt levels.

8 While the tax reforms have an effect immediately, the spendingincreases have not been translated into appropriations and there is likely to be someslippage from 2018 appropriations into the 2019 fiscal year. Ensuring long-term fiscalsustainability is a concern and efforts to restrain spending growth and raise revenue frommore growth-friendly sources will be important in this policy is gradually becoming less accommodative. Although price inflationhas continued to run below target, inflation is set to rise to modestly above target over thecourse of the projection. With the substantial projected fiscal easing, the Federal Reserve isprojected to raise interest rates to by the end of 2019.

9 Determining the path ofinterest rates is complicated by the uncertainty about the future fiscal stance. If higherspending ceilings are not adopted for 2020, the fiscal impulse would becomecontractionary and policy tightening may pause until there is greater clarity. After asustained period of monetary policy accommodation a number of financial risks haveemerged, notably in the non-financial corporate sector, where leverage is high by little apparent labour market slack remaining, sustaining future growth in livingstandards will require bringing more people into the labour force and strengtheningproductivity growth. The employment-to-population ratio appears low in comparison withmany other OECD countries and policies that help people into employment, such as greaterassistance in job search and training, would underpin stronger activity and reduceinequality.

10 Deregulation and government support of investment in infrastructure wouldhelp mitigate bottlenecks that have emerged in ageing and often poorly maintainedinfrastructure assets. Strengthening competitive pressures, such as by reducingrestrictions on tradeable services, easing occupational licensing, and restricting the use ofnon-compete contracts, would help lift is projected to remain robustThe fiscal boost will contribute to investment and labour market tightening. This willsupport income growth and consumption, offsetting some of the demographic pressuresthat will slow employment fiscal boost will lead to sizeable budget deficits andrising debt levels. Against the backdrop of widespread improvements in external demandexport growth is expected to strengthen, though this is offset by rising imports ofinvestment goods.