The U.S. economy, White House economists believe, is finally on the mend, and for real this time. But bad fiscal policy out of Washington--read premature deficit-reduction--could still mess it all up.

That is the over-arching conclusion to be drawn from the latest Economic Report of the President, a thick report issued Friday morning by the White House Council of Economic Advisers that gives a rundown on what the president’s in-house economics team thinks about the forces shaping the U.S. economy.

The CEA, led by Alan Krueger, seems to embrace the idea that the things that have held back the recovery are finally abating, allowing growth to perk up—but that growth will be held back by tighter fiscal policy aimed at reducing budget deficits over time.

With a bit of understatement, the report acknowledges that “the recovery that began in the third quarter of 2009 has been a long and difficult one for many Americans.” Here is that reality in chart form:

The trillion-dollar question for the economy has been "why has growth been so inadequate." Here, the White House economists offer a view that summarizes their sense of the reasons: "recoveries following financial crises tend to be slow because of delays in the reemergence of credit and reductions in consumer spending as households pay down debt or rebuild their savings,a process referred to as 'deleveraging.'" The report adds that limits to the effectiveness of monetary policy, the overhang of underwater and foreclosed homes, and contraction in state government are other factors.

But the good news is that, if the White House economists have it right, those drags on the recovery are dissipating. For example, they paint a picture of a housing market that is quickly finding balance.

Builders have been putting up houses at well below the rate needed to keep up with population growth for the last few years, as this chart shows:

And home prices, which were at bubbly levels before the crisis, have reverted to their longer-term trend relative to what it would cost to rent.

"Our analysis suggests that the housing market is turning a corner," said Krueger in a conference call with reporters Friday morning. "In particular much of  the excess construction that took place during the boom years has been worked off . . .  This is a positive sign going forward."

Another factor the CEA identifies as a factor in the weak recovery is the state and local government pullback. As this chart shows, in past recoveries this sector has contributed to expansion, whereas in this one states and localities have been cutting their spending.

The CEA argues that these headwinds are dissipating: "While much work remains, the economy is healing and moving in the right direction," and "while risks remain, these indicators suggest a continued strengthening of the recovery."

But the report doesn't shy away from identifying one major risk to this generally sunnier outlook. If the budget deficit is reduced too far, too fast, the White House economists argue, the progress toward stronger growth could stop. They even present a comparative chart to show how they United States economy has done in the last few years compared with neighbors across the Atlantic who have moved more aggressively to cut deficits.

"A comparison of recent economic performance in the United States with that of countries undertaking more abrupt fiscal consolidation underscores the importance of a balanced and responsible approach to return over time to a sustainable Federal budget. Figure 1-4 shows that while GDP in the United States has expanded for 14 consecutive quarters and surpassed its pre-recession peak, the recovery has faltered in places where austerity has been implemented more rapidly."

That is a sign that within the White House, optimistic tone notwithstanding, still sees a risk that fiscal policy could bungle the recovery and leave us in the ugly situation that Britain finds itself. It is a set of ideas that the White House's negotiators will likely have in mind as they begin the next round of talks over funding the government with Congressional leaders.