TD Economics: As Fiscal Drag Dissipates a Sturdier Recovery is in Store

CHERRY HILL, N.J., June 18, 2013 /PRNewswire/ -- Buoyed by rising home prices, American households will drive U.S. economic growth forward according to a report released today by TD Economics (www.td.com/economics), an affiliate of TD Bank, America's Most Convenient Bank^®.

"The outlook for the economy is characterized by the increasing resiliency and confidence of the private sector up against ongoing fiscal restraint," says TD Chief Economist Craig Alexander.

"In the first quarter the headwind on the economy was tax hikes. In the second and third quarters it will be spending cuts from sequestration. As these drags lift, a sturdier foundation for economic growth will be revealed."

TD Economics forecasts the economy will grow 1.9% in 2013. Economic activity should accelerate thereafter, with 2014 chalking up growth of 2.8%.

American households gaining confidence despite fiscal drag

The resiliency of the American consumer was on full display in the first quarter of this year. Despite a hefty increase in taxes that cut nearly 4 percentage points from income growth, consumer spending rose by an impressive 3.4%.

"The strength in consumer spending is evidence that the negative impact of deleveraging is waning and improved balance sheets are providing an offset to fiscal drag," says Alexander.

Fiscal cutbacks will continue over the next several quarters. Automatic spending cuts went into effect in March and will lead to the furlough (unpaid days off) of millions of federal employees over the next several months. This is likely to weigh on economic growth. However, the underlying recovery in the private sector will continue.

Housing rebound continuing; still lots of room to grow

The improvement in household net worth has much to do with the turnaround in the housing market. Home prices have turned positive across the vast majority of the country.

"The housing market has done much of the hard work of clearing the overhang of unsold homes. It is now beginning to pay off in terms of rebounding prices," notes Alexander.

In many parts of the country, the challenge now facing the housing market is too little supply. "The next phase of the recovery will be a stronger rebound in construction," says Alexander.

Housing starts are still well below the level required to keep pace with household growth and depreciation. From their current pace of just under a million units, housing starts are likely to rise to 1.3 million units by the end of next year. The rebounding housing market will go a long way to supporting economic growth and offsetting the drag from fiscal policy.

The Federal Reserve will begin to slow asset purchases later this year

With increased confidence in the pace of economic growth, attention in financial markets has turned to when the Federal Reserve will begin to slow their support for the recovery.

The Federal Reserve has committed to continue its asset purchase program until the outlook for the labor market has improved substantially. "This sets a pretty high bar. While we are getting closer, with the ongoing drag from fiscal policy, we're not quite there yet," notes Alexander.

"We anticipate that by September, the worst of sequestration will have passed and the Fed will have sufficient positive economic news to begin tapering their asset purchases, with the goal to end purchases outright in the first quarter of 2014."

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/qefjun2013_us.pdf

SOURCE TD Bank