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US growth pick up may be too much of a good thing

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Schroders Chief Economist and Strategist Keith Wade updates us on his thoughts on the pace of the current US economic growth…

The US economy has strong momentum having shrugged off the government shutdown, and leading indicators suggest that growth will remain robust in the first quarter of 2014. Risks are still skewed to the upside of our 3% real GDP forecast with signs that capex may also join the party as shareholders become more positive toward companies who invest.

Stronger growth will bring lower unemployment and our view is that the US Federal Reserve will be surprised by the pace of tightening in the labour market. Demographic trends suggest participation will continue to decline even as the economy strengthens, a view at odds with Fed projections. Any monetary policy decision would also depend on an assessment of labour market slack, but a tightening would begin to curtail activity and the focus on demographics is a reminder that the factors supporting strong US growth in the past are waning.

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