TD Economics: U.S. Economy Ready to Take Off, but Fiscal
Uncertainty Is Blocking the Runway
CHERRY HILL, N.J. and
PORTLAND, Maine, Dec. 13, 2012 /PRNewswire/ -- The main
obstacle standing in the path of faster U.S. economic growth is a
strong headwind blowing in from fiscal restraint, according to a
report released today by TD Economics (www.td.com/economics), an
affiliate of TD Bank, America's Most Convenient
Bank®.
(Logo:
http://photos.prnewswire.com/prnh/20081031/NEF005LOGO-a)
"Without fiscal drag, the U.S. economy would be headed for a
growth trajectory in the 3-4% range in 2013," says TD Chief
Economist Craig Alexander. "The
worst of the consumer deleveraging cycle and its dampening effect
on economic growth appear to be over. But just as the private
sector is set to provide a welcomed tailwind to the economy, it
will be met with worsening cross winds from public sector
restraint."
Alexander acknowledges that the result is likely to be a pace of
economic growth that is little changed from the past year.
TD Economics forecasts economic growth to average 1.9% in 2013 –
down from an estimated 2.2% in 2012. However, by the second half of
next year, clearer fiscal policy should lead to resurgence in
private demand, placing the economy on a stronger footing with 3.0%
growth in 2014.
Still waiting for a path around the fiscal cliff
With
a few weeks to go before deep spending cuts and tax hikes arrive
and hamper economic growth, a deal to avoid them between the White
House and Congress has yet to be reached.
"The fact that businesses are pulling back on investing, despite
healthy balance sheets and record low interest rates, is a sign
that fiscal cliff concerns have already taken a toll on economic
growth," notes Alexander.
TD Economics estimates that if all tax hikes and spending cuts
are allowed to take place as scheduled, it would cut 3.0 percentage
points from real GDP in 2013.
"Our forecast assumes a deal will be made that avoids plunging
the U.S. economy back into a recession in the first half of 2013,"
says Alexander. "However, spending restraint and tax increases will
still cut economic growth by 1.3 percentage points in 2013,"
Alexander warns that until there is more clarity on the
political front, the fiscal situation represents the largest source
of economic uncertainty.
As housing rebounds, faster growth is waiting in the
wings
The constraint on growth posed by fiscal policy comes
amid signs that housing has entered a self-sustaining recovery.
Home prices have risen consistently through 2012 while
delinquencies and foreclosures have fallen.
The rise in home prices has been substantial – prices are up
5.0% from year-ago levels – and appears sustainable. The fall in
construction activity over the last several years has cleared the
supply overhang and allowed rising demand to pull up prices.
"A strengthening housing market recovery alongside rebounding
consumer credit markets is a good reason to expect acceleration in
economic growth," says Alexander. "The past vicious cycle in the
housing market is turning into a virtuous one, giving every reason
to believe that a more familiar recovery will spring free."
The Federal Reserve is doing everything it can to support
growth
The housing market has also been the focus of the
Federal Reserve, whose latest round of quantitative easing has
focused on purchases of mortgage-backed securities.
"The Fed has pulled out all the stops to support the recovery in
housing and offset some of the drag from fiscal policy," notes
Alexander. "But, as several Fed members emphasized, monetary policy
can provide some relief, but it can't single-handedly offset the
fiscal headwind."
"A clearer path to fiscal consolidation alongside continuation
of accommodative monetary policy will be the necessary cocktail for
stronger economic growth in 2014," concludes Alexander.
TD Economics provides analysis of global economic performance
and forecasting, and is an affiliate of TD Bank, America's Most
Convenient Bank®.
The complete findings of the TD Economics report are available
online at
http://www.td.com/document/PDF/economics/qef/qefdec12_us.pdf
SOURCE TD Bank