With the Federal Reserve finally raising interest rates last week, some of the drama has been removed from the release of broadly-watched economic indicators such as GDP.
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In recent months, each release of GDP (gross domestic product), or the monthly jobs report, or last month’s existing home sales seemed like an individual referendum on whether or not the Fed should, could or would start raising rates at their next scheduled meeting.
Now that the initial liftoff is over, investors, analysts and economists will start to focus on the trajectory of rate hikes going forward. That’s why Tuesday’s release of the third and final estimate of third-quarter GDP is important.
“With the Federal Reserve's first hike in the rearview mirror, the conversation shifts to the path of the hiking cycle,” a Bank of America Merrill Lynch Global Research report released last week explained.
Most analysts expect the final estimate by the Commerce Department to show a slight downward revision to anywhere from 2.0% to 1.8% from the 2.1% third-quarter growth rate reported in an earlier estimate. “The majority of the downward revision owes to a slightly faster pace of inventory reduction,” the BofA Merrill Lynch analysts said.
And fourth-quarter GDP isn’t looking much brighter – the BofA Merrill Lynch analysts have it forecast at a tepid 1.5% as inventories continue to decline, and warm weather throughout much of the U.S. and falling oil prices cut into energy production.
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Also cutting into GDP is a strong dollar that has made imported products cheaper while raising the price for U.S. exports. The domestic manufacturing sector has suffered accordingly under this dynamic.
GDP grew 3.9% in the second quarter.
The sustained strength of the U.S. dollar is being cited as a major culprit for the downturn in economic growth during the second half of 2015, specifically in the area of weaker exports.
As other currencies are being devalued around the world by central banks looking to boost their regions’ economy by spurring exports, currency investors have been targeting the U.S. dollar, boosting its value and keeping it at an elevated rate throughout 2015.
The downside to a strong dollar and weakened foreign currencies is that it makes it more expensive to buy U.S. goods in foreign markets, which has cut into exports and hurt the U.S. manufacturing sector.
Also cutting into U.S. GDP is weakened demand in emerging markets such as China, where reports have surfaced that the world’s second-largest economy is slowing after years of staggering growth. A slowdown in demand from China will have a ripple effect throughout the global economy.
The soft GDP figure is expected to be temporary, however, not least because consumer demand has remained strong. Inventories are subject to roller-coaster cycles, which always have a dramatic but usually short-lived impact on GDP, and the dollar isn’t expected to rise much further.
Consequently, if domestic demand continues to rise as projected by consumer spending, that should put a charge in domestic economic growth during the 2015 holiday season and well into 2016. Consumer spending, after all, represents 70% of GDP.