CHERRY HILL, N.J. and PORTLAND, ME -- The U.S. economic recovery has hit its stride, according to a report released today by TD Economics, an affiliate of TD Bank, America's Most Convenient Bank®.

"The headline data points to sturdy growth in the quarters ahead, and with household incomes supported by tax cuts and businesses incented to invest, real GDP looks set to grow by 3.0 percent in 2011," says TD Chief Economist Craig Alexander.

Gaining traction

The U.S. economic recovery is continuing to gain traction as it moves further away from the financial crisis and recession. Nowhere is this more evident than with U.S. consumers, who roared back to life in the fourth quarter of 2010. Purchases of big ticket items like cars and furniture are up in splendid fashion, with more room to grow. The growth in durable goods spending comes at a time when household balance sheets are stabilizing. Although spending will be restrained by diminished household wealth, TD Economics believes that much of the correction in household behavior has already taken place. The biggest economic drag from household deleveraging occurs from the swift change in the savings rate, rather than the level itself. At this stage of the economic cycle, further upward pressure on the savings rate is limited.

The other major positive development to have taken place recently is on the jobs front. In February, private payrolls topped 200,000 for the first time since April 2010. Although it will take time to recoup all of the 8.4 million jobs that were lost during the Great Recession, the fact that the economy is starting to make some headway is encouraging. "Combined with the fiscal and monetary stimulus currently in place, it appears the stars are aligned for consumers to play an important role in supporting economic growth over our forecast horizon," says Alexander.

Keeping an eye on the risks

Nonetheless, as the events of recent months have made clear, the world economy is still a risky place. In addition to the usual suspects -- continued woes in the U.S. housing market, the uncertain course of U.S. fiscal policy, and the European sovereign debt crisis -- new risks have come to the forefront: Political instability in the Middle East and North Africa poses upside risks to crude oil prices, and the earthquake and tsunami in Japan has temporarily hobbled the world's third largest economy.

"Just as consumer spending appears to be regaining its footing, households are getting hit by higher prices at the pump," notes Alexander. Consumer spending makes up nearly 70 percent of U.S. economic activity; the current 15 percent jump in gas prices, if sustained, could cut 0.2 percentage points off consumer spending in the near term. "Especially in suburban areas where most activities -- work, the grocery store, the doctor's office -- are a drive away, households can't help but absorb the higher gas prices."

In the twilight of fiscal and monetary stimulus, high oil prices have come at an inopportune time. The Federal Reserve is roughly half-way through its $600 billion of large scale asset purchases (though it is likely to keep interest rates near zero through the first quarter of next year). The conversation among Washington lawmakers is increasingly centered on how to reign in the country's large fiscal deficit. While major changes are still a ways off, recent moves by House Republicans suggest that at least some restraint will make its way into the next budget. According to Alexander, "the U.S. absolutely needs to address its debt issues down the line. But, being too aggressive with cuts too soon would present a downside risk to the pace of the recovery."

Bottom line

Despite the risks, the recent strength in consumer spending, in combination with increasing signs of accelerating job growth, offer upside potential to the economic forecast. While the range of possible scenarios is considerable, the most likely path is for gradual repair and improvement. With real GDP growth of 3.0 percent over the next two years, the unemployment rate will move gradually lower. From its current level of 8.9 percent, the unemployment rate is expected to reach 8.6 percent by the end of this year and 8.1 percent by the end of 2012.

TD Economics provides analysis of global economic performance and forecasting, and is an affiliate of TD Bank, America's Most Convenient Bank.

SOURCE: TD Bank

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