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TD Economics: U.S. Economy Ready To Take Off, But Fiscal Uncertainty Is Blocking The Runway

"Our forecast assumes a deal will be made that avoids plunging the U.S. economy back into a recession in the first half of 2013," says Alexander. "However, spending restraint and tax increases will still cut economic growth by 1.3 percentage points in 2013,"

Alexander warns that until there is more clarity on the political front, the fiscal situation represents the largest source of economic uncertainty.

As housing rebounds, faster growth is waiting in the wingsThe 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.

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.

"A strengthening housing market recovery alongside rebounding consumer credit markets is a good reason to expect acceleration in economic growth," says Alexander. "The past vicious cycle in the housing market is turning into a virtuous one, giving every reason to believe that a more familiar recovery will spring free."

The Federal Reserve is doing everything it can to support growthThe 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.

"The Fed has pulled out all the stops to support the recovery in housing and offset some of the drag from fiscal policy," notes Alexander. "But, as several Fed members emphasized, monetary policy can provide some relief, but it can't single-handedly offset the fiscal headwind."

"A clearer path to fiscal consolidation alongside continuation of accommodative monetary policy will be the necessary cocktail for stronger economic growth in 2014," concludes Alexander.

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