The U.S. economy is on track to faster growth, but obstacles will slow progress over the next year, according to a report released today by TD Economics, an affiliate of TD Bank.
TD Chief Economist Craig Alexander predicted that the biggest drag on U.S. economic growth next year will come from tight fiscal policy. If Congress does nothing to change current law, a combination of spending cuts and tax hikes worth 5 percent of GDP will slam the U.S. economy next year. He said policymakers are unlikely to allow the current law to stand, and said this would be too much for the still-weak economy to bear.
TD Economics officials predict economic growth to average 2.2 percent in 2012 and 2.0 percent in 2013. Growth is then expected to rise to 3.2 percent by 2014 as the European economy makes further headway and the outlook for domestic fiscal policy becomes clearer.
Based upon TD Economics Quarterly Economic Forecast, the report says an initially slow pace of economic growth over the short term will leave the unemployment rate unchanged at 8.1 percent through the end of this year. It is expected to edge down to 7.7 percent by the end of 2013, and improve to 6.9 percent by the end of 2014.
"The U.S. economy is healing from the scars of the Great Recession," Alexander said. "While the path to health is becoming clearer, the European recession, the drought in the Midwest, and uncertainty over domestic fiscal policy will continue to weigh on the recovery."
Economic growth has averaged 2.2 percent over the last three years, half the average rate seen during the recoveries following the last 10 recessions. The slow rate of growth is a legacy of the debt accumulated during the boom years and the drop in home prices that followed.
TD executives say progress is being made on both fronts with home prices growing again for much of the nation. As asset values recover, households will make stronger headway in bringing debt burdens down to more sustainable levels. Alexander estimates that households have recovered 70 percent of their net worth lost during the recession. The Federal Reserve's support for the mortgage market and commitment to continued low interest rates will produce faster economic growth.
However Alexander noted that some problems in the housing market still persist. Clearing the inventory of foreclosures will continue to weigh on prices in states that have the worst backlogs. However, home prices are likely to rise modestly over the next year, further supporting household wealth.