President Barack Obama talks with Dennis Hartman, centre, CEO Bryan Hansel and Operations Manager Bob Lucas as they look at rechargeable batteries during a tour of Smith Electric Vehicles in Kansas City, Missouri, July 8, 2010. Smith Electric Vehicles is an all-electric, zero emissions commercial truck manufacturer that received a $32 million Recovery Act grant to build all-electric trucks.

The US economy is recovering according to the IMF (International Monetary Fund) but the Fund said on Thursday, it is "less optimistic than the authorities about the path of growth."

US consumers and financial institutions remain cautious as weak housing markets, high unemployment, and risks in Europe remain a concern, the IMF staff said in a press conference that followed its annual review of the world’s largest economy.

Growth is resuming thanks to government policies and spending to counteract the worst effects of the recession, and the IMF said the United States now faces the challenge of bringing its debt to more sustainable levels without jeopardizing the recovery. The review says since 2007, the debt held by the public has almost doubled to 64 per cent of GDP - - the highest level since 1950 - - and under current policies could reach 95 per cent of GDP by 2020.  The IMF said the authorities’ commitment to halve the budget deficit by 2013, and intention to stabilize public debt at just over 70 per cent of GDP by 2015 are welcome, although much remains to be done to achieve these aims.

Also on Thursday, the Federal Reserve reported that consumer credit outstanding decreased at a seasonally adjusted annual rate of 4.5%, down $9.1bn to $2.415trn - -  the fourth straight monthly fall.

The Fed said revolving credit, or credit-card use, fell a 20th straight time in May, down $7.3bn, or 10.5%, to $830.83bn. Nonrevolving credit fell 1.4%. The category includes loans for cars, tuition, and vacations etc. Home mortgages are not included.

The IMF forecasts US economic growth of just over 3¼ per cent in 2010 and about 3 per cent in 2011, with inflation very low and unemployment remaining above 9 per cent.

“We are less optimistic than the authorities about the path of growth,” David Robinson, a deputy director in the IMF’s Western Hemisphere Department, told reporters. “In part this comes from our research that after a financial crisis there is a permanent loss of output.”

A final report will be issued once it has been discussed by the IMF’s 24-member Executive Board in late July.

Every year, the Fund conducts reviews of its member countries’ economies as part of its work in monitoring the health of the global economy.

Robinson said one of the most serious problems facing the United States is the rise in structural unemployment, which is a mismatch of the supply and demand for labour with the necessary skill set.

The IMF forecasts a gradual reduction in unemployment, which is a typical experience after financial crises according to Robinson. Evidence from the recent crisis shows the drop in employment was much larger than the drop in output, which Robinson attributes to the high degree of uncertainty brought on by the worst economic recession in 80 years.

“Over the medium term we see a need for more fiscal measures than the authorities presently do,” said Robinson. “We both see in the short run there is a balance between starting fiscal consolidation and making sure that fiscal policy doesn’t jeopardize the recovery.”

Discussing mounting fears of a douple-dip recession, with Alan Greenspan, former Federal Reserve chairman and CNBC's Maria Bartiromo:

Stabilizing the debt

While support for growth remains appropriate for this year, in light of the continued underlying weaknesses in the economy, the next challenges for the United States will be to withdraw the support that the government put in place, and to stabilize the size of its public debt, according to the IMF.

The global lender says the United States, which plans to halve the budget deficit by 2013 and stabilize public debt at just over 70 per cent of GDP by 2015, will need to cut back on spending and increase revenues. The government could accomplish the latter through cuts in tax deductions and higher taxes on energy, a national consumption tax, or a financial activities tax.

The key will be to design changes that support further growth in the economy. The IMF suggested three elements for a credible plan.

• A clear plan for stabilizing debt over the coming years

• A downpayment on stabilizing the debt starting in 2011, as planned by the government

• Reform of entitlement programs, such as Social Security.

The IMF said the decision by the central bank to keep its interest rate at a historic low is appropriate, and has been complemented by the clear communication of its plans to shrink its balance sheet to prepare for an eventual exit from ultra-low interest rates.

The IMF said the variety of tools at the Fed’s disposal will help the central bank navigate the changes ahead. These measures include interest on reserves, the selling of securities with an agreement to buy them back later, known as a reverse repo, and the sale of term deposits to banks, all of which can help fight inflation by absorbing some of the banking system’s excess reserves.

Financial system stability improved

The IMF report includes the results of its first examination of the US financial sector, under the institution’s Financial Sector Assessment Program, avoluntary, comprehensive analysis of a country's financial system.

The IMF analysis found that banks and other financial institutions are more stable now, but banks will need more capital to support additional lending as part of the ongoing economic recovery, to meet stiffer regulatory requirements in the future, and to withstand any future shocks to their balance sheets.

“We see key risks on loan losses in commercial real estate sector,” said Christopher Towe, a deputy director in the IMF’s Monetary and Capital Markets Department. “The wave of defaults has yet to crest, and smaller and mid-size banks in particular are likely to face pressures this year and next.”

The IMF said there is also more work to be done to close the gaps in financial regulation and supervision exposed by the global crisis. The IMF’s review acknowledges improvements will come from pending financial reform legislation, but notes that an opportunity seemed to have been missed to create a single federal agency to supervise commercial banks, and another to regulate all securities and derivatives transactions. Going forward, effective implementation will be key and the priorities include:

• Improve interagency cooperation and respond quickly and forcefully to emerging risks to financial stability

• Expand the perimeter of regulation to include more financial institutions and transactions, such as derivatives, and strengthen oversight of firms’ risk management practices

• Address the too-big-to-fail problem by discouraging excessive size and complexity, requiring “living wills,” and introducing credible mechanisms to intervene and resolve failing systemic financial institutions.

Global impact

The IMF said collective policy action to rebalance demand and strengthen growth can pay large dividends. The key contribution that the United States can make to global growth and stability is by raising personal and public savings rates and by strengthening its financial system.

“The United States is no longer going to be the global consumer of last resort, so other countries will need to take up the slack,” said Robinson.

SEE: also Finfacts July 2010 article; US Economy Growth Scare: Still on track for moderate, sustainable growth