The prospects for the U.S. economy have brightened thanks to improvements in the labor and housing markets and policy actions in Europe that appear to have reduced the threat of a near-term financial crisis. That’s the gist of an upbeat economic forecast released Monday by TD Economics, an affiliate of TD Bank.
The group forecasts economic growth to average 2.2% in 2012 and 2.4% in 2013. Rising gas prices and a slowing global economy are expected to restrain growth in the first half of this year. However, in the second half of the year, economic growth is expected to pick up to above 2.5%, according to the quarterly forecast.
“There’s new confidence in the recovery that we haven’t seen in a while,” TD Chief Economist Craig Alexander says in a statement.
Alexander believes that the U.S. economy is better positioned to handle the pain of rising energy costs. That’s because the job and housing markets are slowly getting back on track. The group notes that over half a million jobs having been created so far this year, with more jobs created in January than at any time since 2006. The housing market, in turn, is seeing increased demand as evidenced by rising home sales and tighter inventory.
Despite the rosy outlook, risks remain, mostly on the policy front, according to TD Economics. In Europe, structural balances within the eurozone haven’t gone away, even with actions taken by European leaders to reduce the possibility of a disorderly default, the report notes.
“There are still a host of issues that policymakers must resolve before they can put this crisis behind them,” Alexander says in a statement.
In the U.S., longer-term uncertainty surrounding efforts to reduce the budget deficit and the expiration of Bush-era tax cuts, temporary payroll tax cuts and extended unemployment insurance in 2013 can cloud prospects for economic growth next year.
However, Alexander believes this will not occur. He is betting that Congress will reach a compromise so that the “fiscal drag” from reduced federal spending and expiration of tax cuts will be minimized.
Alexander believes that Congress will enact compromise legislation that will reduce the automatic spending cuts that go into effect in 2013. He also anticipates a partial expiration of the Bush tax cuts on $250,000-plus earners.
“The sheer size of the potential fiscal drag makes it unlikely that it will be fully implemented in an economy that is still finding its sea legs,” TD Economics writes in the report.