GDP Report Offers Clearer Picture of Economic Growth

What could speed up U.S. economic growth?

Moody’s Analytics Chief Economist Mark Zandi and Fort Pitt Capital Group senior analyst Kim Forrest on the state of the U.S. economy and its impact on the markets.

The big U.S. economic picture is starting to look a lot better despite a first half that generated an array of all-over-the map data, not least a first-quarter GDP report that showed the economy had shrunk during the first three months of the year.

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Well, never mind.

The Commerce Department on Thursday released its first estimate of second quarter GDP and it wasn’t bad: 2.3% growth, just short of analysts’ estimates of 2.6% and a decent rebound from the soft first quarter. A healthy jump in consumer spending was cited as an important catalyst.

But the real news was that first-quarter GDP was once again revised upward, this time to show the economy grew 0.6% rather than declined by 0.2%. That’s a hugely important distinction – the economy grew in the first quarter, it didn’t contract.

That distinction is undoubtedly not lost on Federal Reserve policy makers as they mull the timing of the first interest rate in nearly a decade.

“Updated GDP numbers deliver a double-punch to U.S. economy doom-mongers, painting a reassuringly bright picture of the health of the US economy so far this year and raising the odds of the Fed hiking interest rates in September,”Chris Williamson, chief economist at research firm Markit said.

Williamson suggested the impact of the psychological lift provided by the first-quarter upward revision shouldn’t be underestimated.

“The new data, and the first quarter revisions in particular, remove a worrying sense of doubt about the health of the economy that will have given cautious policymakers a reason to hold back on hiking interest rates for the first time since rates were effectively cut to zero at the height of the global financial crisis,” he said.

Clearer Trajectory

For months the Fed has kept investors and global markets on pins and needles, awaiting the central bank’s decision to raise borrowing costs. Fed policy makers have deflected pressure away from themselves by saying repeatedly that their decision to raise rates will be “data dependent.”

The problem for all of the investors, economists, analysts and various market players anxiously trying to predict the Fed’s move is that the data has been all over the place. With no clear trajectory for the economy provided by the data, it’s been impossible to project when the Fed might make its move.

And Fed members themselves offered little help on Wednesday, issuing a statement following their latest policy meeting that reflected some recent gains in the labor market but otherwise gave no clue as to when rates might start moving higher.

Thursday’s GDP report and revisions makes the trajectory a lot clearer, and it’s a lot more positive than previously thought.

Carl Tannenbaum, chief economist for Northern Trust in Chicago, said following the Fed’s meeting Wednesday that today’s GDP report, combined with the next two monthly employment reports, will go a long way toward sealing the Fed’s decision on a rate hike.

Since labor markets have been a bright spot for the U.S. economy for most of 2015, there’s no reason to believe the July and August reports will disappoint and throw cold water on the momentum gaining for a September liftoff.

“Importantly, the pace of growth is translating into an impressive rate of job creation. The PMI data suggest non-farm payroll will rise by 225,000 again in July, building on an average 207,000 net monthly gain in the first half of the year and meaning full employment grows ever closer. The jobless rate has already fallen to a seven-year low of 5.3%, down almost a full percentage point over the past year,” Williamson said.

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