The Fed's apparently isn't convinced yet, but the improvement evident in many of the key forward-looking indicators suggests that economic growth is accelerating. The surge in both the manufacturing and non-manufacturing ISM activity indices is very similar in magnitude to the upturn in early 2003, which was followed by several years of stronger GDP growth. Admittedly, rising interest rates appear to be dampening the housing recovery. Nonetheless, the outlook for investment is improving and the pick-up in growth in Asia and Europe bodes well for US exports. We would be less confident if this improvement in the forward-looking indicators was coming out of the blue, but it makes sense given the backdrop of a fading fiscal drag. There is the risk that a government shutdown could hit fourth-quarter GDP but, if Congress can avert catastrophe, the pick-up in growth should be enough to persuade the Fed to begin tapering its asset purchases before year-end.
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