Growth of the U.S. economy has been revised downward for the 2007-2009 period, making the Great Recession even deeper than originally recognized. Despite the generally downbeat nature of the historical GDP revisions, GDP growth for the first quarter of this year was revised upward. Unfortunately, the strong first-quarter performance was temporary. The “advance” report on GDP for the second quarter shows a slowdown to 2.4% growth, and monthly data released since the advance report indicate a substantial downward revision to second-quarter growth when the “second” estimate is released.

The NAHB near-term forecast for GDP growth has been trimmed, but still calls for the economy to avoid a double dip recession and to gather forward momentum in both 2011 and 2012. Key assumptions underlying the forecast include that the Federal Reserve  will use both conventional and unconventional policy tools, as needed, to get the economic recovery on a stronger growth path without igniting serious inflation pressures. In particular, the Bernanke Fed will maintain the 0.0 to 0.25% target range

The Fed will not “neutralize” excess reserves in the banking system via use of term repos or term deposits, and the Fed will not sell assets from its portfolio prior to increasing the funds rate. The Fed will continue to reinvest repayments of housing agency debt and MBS in longer-term Treasuries, and the Fed will resurrect quantitative easing measures (increasing the size of its balance sheet) if the economy falters or deflation becomes a serious threat.

The forecast also assumes that support to the economy from federal fiscal policy will weaken during the 2011-2012 period. We’ve recently seen the last extension of unemployment benefits for the long-term unemployed, as well as the last round of federal aid to the states. Congress and the Administration will be facing political realities that will prevent enactment of another major fiscal stimulus bill during the balance of the 2010-2012 period. Support to the economy from the American Recovery and Reinvestment Act of 2009 will begin to wind down early next year, and the Bush tax cuts for the top two income brackets will be allowed to expire at the end of this year.