Recovery slowly gathering momentum as fiscal drag fades

The incoming data suggest that labour market conditions remain soft, but the wider economic recovery does appear to be strengthening, as the severity of the fiscal drag begins to fade. Admittedly, our calculations suggest that GDP growth slowed marginally to 2.2% annualised in the third quarter, from 2.5% in the second. Furthermore, the government shutdown means that any acceleration in fourth-quarter GDP growth will be modest at best. Nevertheless, underlying retail sales growth appears to be picking up, as the impact of the payroll tax hike at the start of this year fades. Non-residential construction is also expanding at a faster pace. Overall, we still expect GDP growth to accelerate from 1.6% this year to 2.5% in 2014 and 3.0% in 2015.