Moody's Annual Report: US Government's Aaa Rating supported by enduring economic strength despite entitlement headwinds

The US government's Aaa rating and stable outlook are supported by significant credit strengths, including the resilience of the nation's economy and the fact that it accounts for major shares of global trade, international finance and corporate activity, says Moody's Investors Service in its annual report on the United States government.

"The US economy is highly diversified and it enjoys a track record of relatively solid GDP growth," said Sarah Carlson, a Senior Vice President at Moody's. "The long-term growth outlook for the US also compares favorably with most Aaa-rated governments."

Nominal US GDP is expected to reach $18.5 trillion this year, making the US economy nearly twice as large as the combined economies of all other 11 Aaa-rated sovereigns, according to the report "Government of the United States of America - Aaa Stable; Annual Credit Analysis."

In addition, the status of the dollar as the global reserve currency and the status of US Treasury bonds as the global debt market benchmark are key attributes that support the government's capacity to maintain a higher level of debt relative to other countries.

Nonetheless, the US faces some important credit challenges in coming years. Most importantly, we project spending on entitlement programs, particularly Medicare and Social Security, will begin to put pressure on federal budget deficits later in this decade.

We expect the federal budget deficit to hover around 3% of GDP through 2020, after which it will rise gradually. Toward the end of this decade, without any changes in policy, the deficit will start to widen, primarily due to pressure from Medicare and Social Security.

Spending on social security and healthcare is projected to climb from 49% of total federal spending in FY2016, to 55% by 2030, according to the Congressional Budget Office.

Meanwhile, the ratio of federal government debt-to-GDP has increased in fiscal 2016, likely reaching 77% by the end of the year. This level indicates that the US government now has less flexibility than in the past should it face another major economic shock.

Moody's credit analysis on the United States government is an annual report and does not constitute a rating action.