U.S. Shows Signs of Slow Growth
The U.S. economy has shown tangible signs of improvement over the past couple months. From labor market improvements to credit expansion, there is little question that the U.S. economy is on the road to recovery. In fact, Federal Reserve economists now believe that U.S. real GDP growth will grow at a pace of around 2.5% in 2012 and 3% in 2013.

Despite these positive signs, investors only have to look a year back to see how positive improvements can go awry. The U.S. was recovering modestly in 2011 before the Eurozone's sovereign debt crisis hit and sent the economy into double-dip territory. Many economists believe that this time is different, but there are several key risks that remain.

Three Key Drivers of U.S. Growth
The majority of the growth seen in the U.S. economy has come from three key cyclical sectors, including the automotive sector, residential construction and capital spending. A strong labor market has helped support demand for both automobiles and new housing, while strong corporate cash flow and very low interest rates have driven capital spending.

The burgeoning domestic oil and gas sector has also boosted both consumer and corporate confidence over the past few months. Development of these resources has led to both job creation and higher spending, while the prospect of lower future energy costs for domestic manufacturers has improved business confidence and encouraged capital spending.

SEE: The Ups And Downs Of Investing In Cyclical Stocks

Risks Remain, but No 2011 Deja Vu
The U.S. economy may be recovering, but Federal Reserve economists (of all people), remain very cautious. The burden of excess debt and lower real estate prices continue to force consumers to deleverage, while policy uncertainty has encouraged businesses to keep a high margin of safety in the form of cash reserves.

Luckily, it seems that the recovery today is a little more durable than the one in 2011. Consumer and corporate balance sheets are stronger and the recovery is no longer isolated to just certain sectors and industries. Problems in the eurozone also appear to be relatively contained, while energy prices may have already peaked, according to some analysts.

The Federal Reserve's Ongoing Volatility
Many economists believe that the U.S. economic recovery is strong enough to be self-sustaining at its current levels. But there is a lot of concern over the so-called "fiscal cliff" approaching at the end of 2012, when key government stimulus spending and tax relief efforts are set to expire and could possibly derail the economic recovery in 2013.

The uncertainty has led to some uncertainty regarding Federal Reserve policy, with a third round of quantitative easing still firmly on the table. Such policy actions could result in U.S. dollar depreciation, while the uncertainty surrounding the 2012 deadline could lead to a drag on the economic recovery, making it slower than it could be otherwise.


Next: Investopedia's Forex Outlook For May 2012: European Economy »

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