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IMF: US economy improving but spending cuts a drag

WASHINGTON — The US economy is on sounder footing than it was a year ago but is still being restrained by government spending cuts and tax increases, the International Monetary Fund said Friday.

The IMF’s annual report on the US economy noted the underlying fundamentals are gradually improving: home prices and construction are rising, household finances have strengthened, and employers are steadily adding jobs.

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The outlook was much more optimistic than IMF’s 2012 report.

‘‘There are signs that the US recovery is gaining ground and becoming more durable,’’ Christine Lagarde, the International Monetary Fund’s managing director, said in a written statement.

Still, the IMF forecasts economic growth of just 1.9 percent this year, the same as its April forecast. That would be down from 2.2 percent in 2012. And it’s below many private economists’ expectations for more than 2 percent growth this year.

The International Monetary Fund says the tax increases and spending cuts that kicked in this year will shave about 1.5 percentage points from growth. The international lending organization had opposed the steep federal spending cuts, which began March 1.

The reduction in the US budget deficit ‘‘has been excessively rapid and ill-designed,’’ the IMF’s report says.

A more optimistic outlook

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Congress should cancel the $85 billion in spending cuts, the report urged, and replace them with longer-term reductions in entitlement programs, such as Social Security, that would weigh less on the economy.

The IMF also expects that the Federal Reserve will maintain its bond purchases through the end of the year and will ‘‘very gradually’’ reduce them next year. The bond purchases are intended to lower long-term interest rates and encourage more borrowing, investing, and spending.

Some economists expect the Federal Reserve may begin to reduce its purchases as early as September.

Lagarde argued ‘‘there is no need to rush,’’ given that unemployment is still high and inflation low.

Fed policy makers meet June 18-19 and may provide some hint of their intentions.

Despite the drag from higher taxes and spending cuts, the IMF paints a much brighter picture of the US economy.

A year ago, the IMF warned the recovery was ‘‘tepid,’’ job growth was slow, and US households were still paying off debt.

Now, it sees consumers in better shape and the job market slowly strengthening. After the impact of the tax increases and spending cuts fades, growth should accelerate next year to 2.7 percent. That forecast assumes that members of Congress and the White House will agree to lift the government’s borrowing limit later this year.

Still, the IMF expects unemployment to fall only gradually over the next two years. It forecasts unemployment will average 7.5 percent this year and 7.2 percent in 2014.

The unemployment rate is currently 7.6 percent — 0.6 percentage points lower than a year ago.

The economy is also being held back by weakness overseas, the report said, which is slowing US exports, particularly to Europe.

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