TD Economics: U.S. Economy Stuck in Neutral

Forecast real GDP growth of 1.6% in 2011; slight improvements of 1.7 percent in 2012 and 2.6 percent in 2013.

Sep 13, 2011, 10:26 ET from TD Economics

CHERRY HILL, N.J. and PORTLAND, Maine, Sept. 13, 2011 /PRNewswire/ -- The U.S. economy should continue to expand at a meager pace, though it has very little cushion to absorb additional shocks. This is according to a report released today by TD Economics (, an affiliate of TD Bank, America's Most Convenient Bank®.

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While temporary shocks to the economy in the first half of 2011 – rapidly rising gas prices, the supply shock from Japan, and just plain old bad weather – have dissipated, the upset to confidence is likely to dampen economic growth over the next several quarters.

"Financial markets suffered a crisis of confidence this summer, the fallout from which will impact the economic recovery," says TD Chief Economist Craig Alexander, who authored the report. "A more robust pace of economic growth will require tackling the legacy issues of the financial crisis still burdening the recovery."

Forecasting in uncertain times

Political events in the U.S. and Europe over the summer and the subsequent crisis of confidence have created a far more difficult forecasting environment. Business and household confidence have been undermined against an economic backdrop that already embeds a mortgage market in disrepair, ongoing risk aversion, and balance sheet repair among financial institutions and households.  

"As long as these structural issues persist, it will be difficult for the economy to deliver a stronger recovery," says Alexander.

However, TD Economics cautions that this does not mean the U.S. will be thrown back into a recession. Time is starting to heal the credit environment, particularly for commercial and industrial loans. In addition, the economy is benefiting from a rebound in exports and auto production.

According to Alexander, none of these positive signs are taking hold in large proportions, and as a result, real GDP growth is likely to plod along at a meager pace of just 1.6% in 2011, and improve slightly to 1.7% in 2012 and to 2.6% in 2013.

Structural issues stand in the way of speedier recovery

The dysfunctional housing market and the persistence of long-term unemployment are two key structural issues that are an impediment to a speedier recovery. Mortgage lending plays a central role in generating credit within the financial system, and has failed to show improvement. Approximately seven out of ten households' own residential real estate and mortgage debt accounts for three-fourths of all household liabilities.

The impact also extends beyond households – with roughly 20% of small businesses depending on real estate for loan collateral. With home prices having fallen 30% from their peak, depleted equity has eroded wealth and, for some, has limited access to credit. 

"As a result, consumer spending and credit growth are likely to remain constrained until home prices stabilize," says Alexander. "Unfortunately, this won't occur until progress is made in drawing down the huge stock of foreclosed properties gumming up the market." 

TD Economics estimates that at the current clearing rate of around 1.5 million distressed sales per year, it would take four to five years to clear the inventory overhang.

Unemployment is a symptom of the problem

Difficulties in the labor market are adding to the challenge of a speedier recovery. A key factor differentiating this recovery from past ones is the swelling ranks of the long-term unemployed. The average duration of unemployment reached 40 weeks in July. In perspective, before the downturn, the average duration never exceeded 20 weeks. Many people who lost their jobs during the recession are staying unemployed longer than before. 

"Skills atrophy over time, and a person who has gone without work for over a year will face more difficulty finding employment in their area of expertise," says Alexander.  "Getting chronically unemployed workers working again will require more aggressive action than in previous economic cycles."

Policies try to bridge gap on structural problems

President Obama's recently proposed American Jobs Act represents some upside to TD Economics' forecast. By their estimates, if President Obama's $447 billion plan is put in place, it would boost the economic growth forecast by around 0.8 percentage points in 2012 and add around 800,000 jobs to U.S. payrolls.

However, the lift to economic jobs and employment growth would be temporary, as the expiration of the new fiscal stimulus would then act as a greater drag on economic growth beyond 2013.

"While the American Jobs Act would help shore up job growth, it is unlikely to be a game changer," says Alexander. "Currently, we haven't included these estimates into our forecast, as we wait for clarity on the degree to which policies will be enacted."

On the monetary front, the Federal Reserve has remained committed to supporting the recovery, recently announcing that it plans to leave interest rates at low levels until at least mid-2013. However, it is not clear what more monetary policy can do to jump-start growth with interest rates already at rock-bottom. In a deleveraging cycle, there is simply less demand to borrow or invest at any interest rate.

Bottom Line

The U.S. recovery will proceed, but it is unrealistic to expect a meaningful pick-up in momentum in the face of key structural challenges that remain unresolved.  

"The forecasting environment is riddled with uncertainties related to political unknowns, both domestically and internationally," says Alexander. "TD Economics forecasts another two years of modest growth corresponding with an unemployment rate that is expected to hover around nine percent through 2012 and drop to 8.6 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.

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