New TD report sees economy rising despite increased energy costs

A new report from TD Bank economists suggests that rising energy costs are “the latest speed bump” for an otherwise improving economy.

“There’s a new confidence in the recovery that we haven’t seen in a while,” said TD Chief Economist Craig Alexander in a Monday release.

He pointed to recent positive developments in the labor and housing markets, adding that there was “a strong case for optimism.”

TD Economics, an affiliate of TD Bank, forecasts economic growth to average 2.2 percent in 2012 and 2.4 percent in 2013. The unemployment rate is expected to be at 8.1 percent nationwide by the end of the year, and average 7.5 percent in 2013. The rate is currently 8.3 percent nationwide, and 7 percent in Maine in January (the latest month available).

From today’s release:

One can’t help but get the sense that the U.S. economy has been here before. 2011 also began with fanfare, but then supply-chain disruptions from the Japanese earthquake and an oil price shock knocked economic growth in the first half of that year off course.

 Now, with average gas prices up 45 cents a gallon since January, the worry is that the economy will suffer a repeat of last year’s weak-growth performance. Consumers are unable to cut their fuel consumption overnight, so the rise in prices acts as an implicit tax on earnings, forcing them to cut back spending in other areas. 

 “While it’s an ongoing process, we’ve been here before with high gas prices, and households do adapt by cutting back gasoline consumption,” said Alexander.  “Resurgent auto demand is also helping. During the recession, many consumers put off purchasing new vehicles. Now that they are returning to dealerships in droves, some are using the occasion to switch to more fuel-efficient models.”

According to the release, Alexander thinks other factors will allow the economy to grow despite the energy prices.

Again, from the release:

 For one, momentum in the labor market is more entrenched than it was a year ago. Just over half a million jobs have been created so far this year, with more jobs created in January than at any time since 2006. The unemployment rate at 8.3% is down from 9.1% last summer.

More encouraging is evidence that demand is finally returning to the housing market. Existing home sales in January rose to their highest level since early 2010, when they were buoyed by a temporary tax credit. The number of unsold single-family homes is at its lowest level in half a decade, and tighter inventory coupled with increasing demand may mean home prices could begin to stabilize later this year.

“The recent turn in housing is one of the best signs yet that the recovery is entering a self-sustaining phase,” says Alexander.

The complete report available online at http://www.td.com/document/PDF/economics/qef/qefmar12_us.pdf  under “Regular Publications.”