The economy is back on track, but rising energy costs mark the latest speed bump on the road to recovery, according to a report released today by TD Economics, an affiliate of TD Bank.

"There's a new confidence in the recovery that we haven't seen in a while," says TD Chief Economist Craig Alexander, noting recent positive developments in the labor and housing markets. "There's a strong case for optimism."

TD Economics forecasts economic growth to average 2.2% in 2012 and 2.4% in 2013. The unemployment rate is expected to be at 8.1% by the end of the year, and average 7.5% in 2013.
 
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. 

Alexander is confident that higher prices, which he views as temporary, won't be as economically disruptive this time around.

"While it's an ongoing process, we've been here before with high gas prices, and households do adapt by cutting back gasoline consumption," says 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."

While Alexander acknowledges that higher energy prices will still bite into economic growth, he believes the economy is better positioned to deal with the pain. 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.

To read the full TD Economics report, click here.