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The economic recovery has gained momentum since the first half of last year, with moderate employment gains and a pick-up in the pace of consumer spending. Nevertheless, real GDP growth is projected to increase only gradually this year and next, as the economy is still overcoming important hurdles. Housing demand has increased noticeably, but the overhang of unsold homes and the tide of foreclosures will restrain the revival in residential investment.
The programmed expiration of tax cuts and emergency unemployment benefits, together with automatic federal spending cuts, would result in a sharp fiscal retrenchment in 2013 that might derail the recovery. Consolidation is necessary, but it should be implemented at a steady, gradual pace consistent with a medium-term plan to restore fiscal stability. Restricting tax expenditures would lower the deficit while reducing market distortions and narrowing income inequality. Monetary policy should remain accommodative as long as the extensive economic slack persists.
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