US economy poised for growth, but austerity threatens

US Treasury

According to a report from Canada-based financial services firm Toronto Dominion’s (TSX: TD) (NYSE: TD) US-based TD Bank’s TD Economics affiliate, the main obstacle standing in the path of faster US economic growth is a strong headwind blowing in from fiscal restraint.

The report said that, without fiscal drag, the US economy would be headed for a growth trajectory in the 3-4% range in 2013.

It said that the worst of the consumer deleveraging cycle and its dampening effect on economic growth appear to be over. But just as the private sector is set to provide a welcomed tailwind to the economy, it will be met with worsening cross winds from public sector restraint.

TD Economics forecasts economic growth to average 1.9% in 2013 down from an estimated 2.2% in 2012. However, by the second half of next year, clearer fiscal policy should lead to resurgence in private demand, placing the economy on a stronger footing with 3.0% growth in 2014.

With a few weeks to go before deep spending cuts and tax hikes arrive and hamper economic growth, a deal to avoid them between the White House and Congress has yet to be reached.

TD Economics estimates that if all tax hikes and spending cuts are allowed to take place as scheduled, it would cut 3.0 %age points from real GDP in 2013.

The constraint on growth posed by fiscal policy comes amid signs that housing has entered a self-sustaining recovery. Home prices have risen consistently through 2012 while delinquencies and foreclosures have fallen.

TD said that the rise in home prices has been substantial prices are up 5.0% from year-ago levels and appears sustainable. The fall in construction activity over the last several years has cleared the supply overhang and allowed rising demand to pull up prices.

The housing market has also been the focus of the Federal Reserve, whose latest round of quantitative easing has focused on purchases of mortgage-backed securities.

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