13 Jul

Is the Upward Revision in US GDP Good Enough for a Rate Hike?

WRITTEN BY David Ashworth FEATURED IN Macroeconomic Analysis


When the FOMC (Federal Open Market Committee) met in April, the economy wasn’t doing well. The Bureau of Economic Analysis released the advance estimate of economic growth in 1Q16—the first of three estimates. It showed that US economic growth slowed to a 0.5% pace in 1Q16—compared to a 1.4% pace a quarter ago.

Slow growth in the first quarter isn’t unusual for the US economy. Unlike some of the previous years, a harsh winter wasn’t the reason for constrained economic activity. In 2015, a harsh winter hampered homebuilding activity and kept shoppers indoors. This impacted retailers such as JCPenney (JCP), Macy’s (M), and Nordstrom (JWN). However, that wasn’t the case in 2016. The winter was much milder due to the El Nino effect.

Is the Upward Revision in US GDP Good Enough for a Rate Hike?

By the time policymakers met for the June meeting, there was better news for the economy. The second estimate showed that US economic growth in 1Q16 was 0.8% instead of 0.5% reported earlier. This pace increased even more in the third estimate. US economic growth is now estimated to have grown 1.1% in 1Q16.

Do these upward revisions bode well?

Broadly speaking, yes. Especially since 1Q16 GDP has been revised upwards two times in a row. This made policymakers happy. Just the first upward revision had the FOMC saying that “growth in economic activity appears to have picked up” in its June statement.

Consumer spending (XLP) (MFEGX) (VIGRX) has been instrumental in the upward revision of economic growth. In its June policy meeting minutes, policymakers observed that even after 1Q16, “Retail sales posted strong gains in April and May, and sales of light motor vehicles moved back up.” Their optimism about economic growth in 2Q16 is going to be an important factor in determining if at least one rate hike takes place in 2016.

In the next part, let’s see policymakers’ expectations regarding US GDP growth in 2016 and beyond.

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