The storm has ebbed, but the U.S. economic forecast remains overcast, according toTD Economics.
“We don’t expect to see any miracles occurring over the next several months…but the evidence appears to be for the gradual unwind of imbalances and a continued slow pick-up in economic activity-and not another descent into recession,” wrote Deputy Chief Economist Beata Caranci and Senior Economist James Marple in TD Economics’ latest U.S. Quarterly Economic Forecast report.
Noting that bad economic news tends to make headlines, the authors highlighted the positive economic developments of recent months and presented a case for guarded optimism with respect to the economy’s nascent recovery. Private domestic demand-the key ingredient to a sustained expansion-has seen a strong burst of activity of late, fueled by a 17.6% annualized increase in business investment. This would not have been possible without some thawing of credit markets. Signs that credit conditions are easing, especially for small businesses, are encouraging, as they suggest that monetary stimulus is getting through to the real economy.
“While there is a case for optimism, what we really strive for is realism, and it is true that the bears of this world have not had major difficulty finding reasons to be negative,” the authors wrote.
Growth in domestic demand has slowed in the current quarter, and will likely continue to slow as business investment comes off its initial growth spurt and home sales decline in the aftermath of the expired homebuyer’s tax credit. Just as important, job growth, while consistently positive in 2010, has also been sluggish. In a recession and recovery characterized by private-sector deleveraging, a slow improvement in personal income growth will act as a natural constraint on private demand growth.
The recovery is expected to continue to present challenges for policymakers, who face an electorate weary of record deficits and big bailouts. While economic growth will continue to be positive, it is not likely to grow fast enough to bring down the unemployment rate in the near term. On the fiscal front, any new stimulus measures must be balanced against the need to bring down budget deficits in the future. For the Federal Reserve, the main option for further stimulus is an even greater expansion of its balance sheet, which could complicate the removal of stimulus once economic conditions normalize. In all likelihood, economic growth will continue to improve and stimulus will be gradually withdrawn. However, with so little margin of error between positive and negative growth, policymakers will stand ready to step in with greater stimulus should it be warranted.
TD Economics also noted that with corporate profits rebounding and credit conditions easing, the most likely scenario is for a continued pace of economic expansion of 1.9% in 2011 and 2.6% in 2012.
TD Economics provides analysis of global economic performance and forecasting, and is an affiliate of TD Bank.