GDP Growth in the Second Quarter – Upside Surprise, Implications for Fed Action?

The Bureau of Economic Analysis (BEA) released its second estimate of real GDP growth for the second quarter of 2015, revising the earlier 2.3% growth estimate up to 3.7%. The revisions were broad based with faster growth in consumption, investment, government spending and trade adding to the upward revision.

Business investment contributed 0.8 of the 1.4 percentage point increase, followed by government spending, dominated by state and local spending, adding 0.3 percentage points. The increased business investment was mainly fixed investment (plant and equipment) but also included increases to inventories. With inventory investment already at an elevated pace this points to some payback, subtracting from growth, in future quarters.

The upward revision in government spending came from a surge in spending by state and local governments, raising the question of sustainability. Overall, the GDP report is good but growth is likely to slow to a more sustainable pace near 3.0% going forward.

The surprising strength in this estimate won’t force the Fed’s hand with respect to plans for raising interest rates, possibly beginning at the upcoming September meeting. Nor will the prospect of a slowdown in growth in the second half of the year prevent the Fed from moving in September. And while a slowing global economy (China) and recent turbulence in global stock markets have been cited as reasons for the Fed to postpone raising interest rates, the strength in the US economy should be a calming influence. The reverberations from overseas events will have to pose a larger or more persistent threat than they currently do to have a significant impact on the Fed’s stated desire to begin the process of normalizing monetary policy this year (Fed).

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1 reply

  1. I do not believe the FED will raise rates based on the second quarter GDP of 3.7% because the combined GDP for the first half of 2015 was just 2.15%. Anyone who believes that the economy is back should walk slowly through the local mall or drive slowly passed strip centers and count the vacant storefronts. My bet is that the next revision of the second quarter GDP will show annual growth to be less than 3%.

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