Tepid 3Q GDP Shouldn't Derail December Rate Hike

By Economic IndicatorsFOXBusiness

Nothing in Tuesday’s third-quarter GDP reading should dispel the conviction that the Federal Reserve will be raising interest rates in December.

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Plain and simple: It wasn’t a great number. The Commerce Department said gross domestic product, or the total value of all the goods and services produced in the U.S., increased at a seasonally adjusted annual rate of 2.1% last quarter.

That’s up from an initial estimate of 1.5%, reflecting a smaller-than-expected drawdown in business inventories and upward revisions to business spending. The 2.1% reading matched analysts’ estimates but marked a sharp slowdown from the 3.9% rate of growth in the second quarter.

Of course, every economic data release must be filtered through the prism of the debate raging at the Fed over the timing of the first rate increase in nearly a decade.

“While the Federal Reserve will also be interested in the employment situation for November, this release keeps a December rate increase in play,” said economists at IHS Global Insight in a research note.

Analysts generally believe that it will take a dramatic market shaking event to alter the Fed’s plans for lifting in December. A lousy September jobs report wasn’t enough, in part because it was offset by a surprisingly strong October labor numbers. And the Paris terrorist attack was barely acknowledged by global markets.

The Fed has said for months that it will be sifting through an array of economic data as it makes its decision and that the data will have to indicate that labor markets are showing signs of sustained strength and that inflation is clearly moving higher toward the Fed’s 2% target.

Today’s GDP reading blends into that mix without offering a compelling argument for another delay. Also blending into the mix was Tuesday’s release of October’s consumer confidence report.

The report showed U.S. consumer confidence has fallen to its lowest level in more than a year. The Conference Board said its index of consumer confidence fell to 90.4 in November. The surprise drop marks the lowest level since September 2014 and was significantly below the Thomson Reuters estimate of 99.5.

In fact, November’s 90.4 reading was lower than all of the 63 economist estimates compiled by Thomson Reuters. On a positive note, October’s confidence reading was revised upward to 99.1 from the 97.6 originally reported.

Since much of the recent data has offered a mixed view of the economic recovery while broadly pointing slowly higher, it’s widely believed that the Fed is convinced that the economy is ready to take the next step toward ‘normalization.’

“The battle continues within the US economy. On the dark side, a strong currency, sluggish global growth and reduced oil and gas capex are weighing on business investment and net exports. On the bright side, an improving labor market, firming wage growth, low inflation and still-low interest rates are supportive of domestic outlays,” said economists at Oxford Economics.

“While we believe the US cannot remain the global growth locomotive indefinitely, we firmly believe there is still plenty of coal in the burner… We see the Fed proceeding to rate liftoff next month, but following a very gradual monetary policy tightening path,” they added.

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