TD Economics' Quarterly Economic Forecast: U.S. Economy Is Down, But Not Out

CHERRY HILL, N.J. and PORTLAND, Maine, June 14, 2011 /PRNewswire/ -- The U.S. economy may be down, but don't count it out. That is the message of a report released today by TD Economics (www.td.com/economics), an affiliate of TD Bank, America's Most Convenient Bank^®.

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The TD Economics report cites several signs that bode well for the second half of the year, including slowed but positive consumer spending, stabilized energy prices, and healing credit markets. TD Economics forecasts economic growth to average 2.6 percent through 2011, the unemployment rate is expected to remain elevated at 8.6 percent by the end of next year.    

"The economy hasn't lost its ability to rebound," says TD Chief Economist Craig Alexander, "but we must bear in mind that the recovery is taking place in a post-financial crisis environment, which means that slow growth and high unemployment are par for the course."

More of the same

Economic sentiment has soured in recent months, as the economy jostles from one external shock to the next. Gas prices have risen nearly 20 percent since the start of the year, which has eaten into disposable incomes and caused a retrenchment in consumer spending. The manufacturing sector, hitherto a key driver of growth, faltered in April as Japanese-related supply-chain disruptions undermined production momentum. In the latest sign of weakness, last month's employment report showed the economy created a mere 54,000 jobs in May, a sharp drop from the 220,000 jobs averaged in the three months prior.

The TD Economics report cautions not to place too much weight on the slew of lackluster data.  

"There are a lot of 'special' factors at play here -- gas prices and the Japanese supply shock being chief among them -- that lead us to believe the economic recovery has hit a speed-bump, not a road block," Alexander explains.

He notes that once supply chains are reconstituted, industrial production should pick up speed, especially in the automotive sector where there's still a lot of unmet demand.

"All those people who couldn't get their preferred color of a Japanese car this month will come back next month, or the month after that, when stocks have been rebuilt," says Alexander. Those purchases should look even more attractive now that gas prices have pulled back nearly 20 cents a gallon from their peak in April.

Of Housing…

Yet, even after the temporary shocks peter out, the economy must still contend with the main legacy of the financial crisis: a stubbornly weak housing market. TD Economics notes that as long as home prices are declining, there can only be limited improvement in household balance sheets. And although these low prices should be a boon for first-time homebuyers, high down-payment requirements are limiting many from entering the market. As a result, home sales are no higher today than they were in 2008, and more than two million below their peak levels in 2005.

Still, TD Economics feels that eventual recovery in the housing market is not a matter of if, but of when.

"Housing's silver lining is that virtually no new supply is entering the market through construction, which means inventories of unsold homes are not getting any bigger," says Alexander. "This, coupled with falling delinquency rates, means that even tepid sales activity is able to whittle down excess supply, marking a step in the right direction."

…And Fiscal Houses

Just as households are shoring up their balance sheets, so are governments trying to patch up theirs. Sovereign debt issues present a key downside risk to the medium-term outlook. In Europe, policy-makers are feverishly working to prevent a Greek default for fear that such an event would wreak havoc on the broader European financial system. In Washington, the Treasury announced last month that unless Congress votes to raise the debt ceiling, it would be unable to pay creditors come early August. TD Economics thinks this latter outcome is unlikely, but stresses the need for the U.S. to come up with a credible medium-term plan to balance the books.

"The problem is that we are in a political standoff between spending cuts and tax hikes. In reality, both are needed to put the country's fiscal position on a sustainable footing," says Alexander.

Bottom Line

All told, the balance of risk points to much of the same: a drawn out, risk-filled recovery, but a recovery that is progressing nonetheless. According to Alexander, "imbalances from the financial crisis take years to work through. It would be unrealistic to expect otherwise … But, that doesn't mean we aren't making progress, we're just going to move at half the speed."

TD Economics forecasts economic growth to average 2.6 percent through 2011, and 3.0 percent in 2012 and 2013. From its current level of 9.1 percent, the unemployment rate is expected to remain elevated at 8.6 percent by the end of next year, and 8.1 percent by 2013.    

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/economics/qef/qefjun11_us.pdf under "Regular Publications."

SOURCE TD Bank