The weather-related slump in activity in the first quarter persuaded many that the US economic recovery would remain lacklustre. The fundamentals look a lot better now, however, with credit constraints easing and the fiscal drag fading. Employment growth has picked-up pace in recent months and, supported by a significant acceleration in the growth rate of bank loans, activity is rebounding. The growth rate of manufacturing output has already strengthened markedly and the latest survey evidence suggests it could reach double-digit annualised rates soon. We still think this will be the break-out year for the US recovery and, coupled with the clear evidence of a pick-up in inflation, that could prompt the Fed to raise rates even before the middle of next year.
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