CHERRY HILL, N.J. and PORTLAND, Maine, March 19, 2013 /PRNewswire/ -- The American economy will be resilient to tax hikes and government spending restraint, according to a report released today by TD Economics (www.td.com/economics), an affiliate of TD Bank, America's Most Convenient Bank®.
"Job growth is strengthening, housing is rebounding and equity markets have reached new highs," says TD Chief Economist Craig Alexander. "If it weren't for tax hikes and spending cuts, the economy would be well on its way to 3 to 4% growth."
Instead, TD Economics forecasts the economy will grow 1.9% in 2013, below the 2.2% average pace of growth seen in the first three years of economic recovery since the Great Recession. Economic activity should accelerate as the year goes on, with 2014 chalking up sturdier growth of 2.8%.
Past the fiscal cliff, but into the valley of sequestration
Back in December, the key risk to the economic forecast was the fiscal cliff. Fortunately, Congress reached a deal in January to avoid the majority of the cliff by making permanent the Bush-era tax rates on income lower than $450,000.
"Decision makers still left enough fiscal drag to bite," notes Alexander. "Congress did not extend the payroll tax holiday – resulting in a $700 tax increase on the average household; and on March 1, they allowed automatic spending cuts – also known as sequestration – to kick in."
Sequestration represents the cancellation of $85 billion in government spending authority and will require defense agencies to trim their budgets by 8% and non-defense agencies by 5% over the next six months. TD Economics estimates this will cut 0.6 percentage points from economic growth in 2013.
Beyond the tax hikes and spending cuts already enacted, other fiscal risks remain. Congress has yet to agree on a budget and is fast approaching a March 27 deadline to avoid a shutdown of non-essential government services. In May, the U.S. government will again approach the statutory debt ceiling, requiring politicians to once again work together to avoid threatening the recovery.
"We take heart in the fact that compromises have been occurring, but must also recognize that policy gridlock will remain a key downside risk to the economic outlook," says Alexander,
Housing rebound continuing; still lots of room to grow
One of the best news stories of the past year has been the recovery in the housing market. Home prices were up 8.2% and residential investment rose 15% in 2012.
"This is only the beginning. At the current pace of 890,000 (seasonally adjusted annual rate) reached in January, housing starts are still 40% off their long-run level," says Alexander. "Going forward, residential investment is likely to directly add 0.4 percentage points to growth in 2013 and 0.5 percentage points in 2014. Just as important, construction jobs are likely to add around 30,000 to monthly payrolls over the next two years."
The Federal Reserve to remain supportive through 2013
In an environment of sub-2% real GDP growth, the Federal Reserve is likely to continue its current program of $85 billion in monthly asset purchases at least through the end of 2013. This will help keep a lid on interest rates and support the recovery in the housing market.
"With the public sector turning towards deficit reduction, prospects for faster economic growth depend on re-leveraging in the private sector," notes Alexander. "Fortunately, with the recovery in housing gaining speed, this rotation is taking place and is set to accelerate in the years ahead."
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/qefmar13_us.pdf
For more information or interviews, reporters may contact the TD Economists directly:
SVP and Chief Economist
TD Bank Group
VP and Deputy Chief Economist
TD Bank Group
TD Bank Group
SOURCE TD Bank