U.S. GDP Growth Revised Upward To 3.7%, Puts Fed Policy Meeting Back In Focus

In the “second revision” of the nation’s real gross domestic product, or GDP, the U.S. Bureau of Economic Analysis data shows that the U.S. economy advanced at a robust annual rate of 3.7% in the second quarter of 2015, the Department of Commerce reported Thursday.

The sharp upward revision may put the topic of the “lifting off” of interest rates back on the table at the Federal Reserve’s Open Market Committee (FOMC) policy meeting on Sept. 16, although New York Fed President William Dudley said on Wednesday “pockets of weaknesses” remain in the U.S. economy that make a hike at next month’s meeting less compelling.

According to the Department of Commerce, which releases and compiles the GDP data, the upbeat estimate released is based on more complete source information than was available after last month’s “advance” estimate when the BLS reported the nation’s economy had advanced 2.3%.

The second revision of the GDP report also shows that second quarter growth is well ahead of the revised 0.6% real GDP growth in the first quarter, and 54% better than the final GDPNow model forecast of 2.4% projected by the Atlanta Fed on July 27. Economists polled by MarketWatch forecast gross domestic product would be revised up to 3.3%.

Mark Fusaro, associate professor of economics in the Arkansas Tech University College of Business, said 2015 is shaping up to look just like 2014. “Weak first quarter, strong rebound in the second quarter,” he said. Earlier this year, Fusaro said he expects the Fed to raise interest rates before the end of 2015.

Still, the Arkansas Tech economist also said a sharp rebound definitely puts the Fed in a tough place for the next FOMC release in three weeks. “The GDP is strong; prices are up, but the volatility in the stock market makes the fed wary of creating more instability with a rate hike,” he said. “Already today the Dow is (back) up another 200 points.”

ST. LOUIS FED CHIEF
According to the BLS, the “second” estimate for the second quarter is based on more complete data. The BLS also emphasized earlier that the second-quarter advance estimates are based on incomplete source data that is generally subject to one additional revision as more data comes later in the year.

St. Louis Fed President James Bullard, who represents the regional Eighth District that encompasses Arkansas and all or parts of six other states, will sit with Fed Chair Janet Yellen and Dudley at the FOMC policy meeting in a few weeks.

In a speech on Wharton Business Radio on Sirius XM on Aug. 21, Bullard said no decision on rate hikes has been made. He also spoke about the down spiral of the Chinese economy caused largely by the yuan devaluation on the U.S. outlook.

“There will be an assessment at the September meeting, which will be mostly centered, I think, on labor market prospects, and cumulative progress on labor markets, growth prospects going forward in the U.S. and inflation in the U.S., and then some on financial stability.” Bullard said.

The St. Louis Fed President added that “anecdotal reports” received from businesses in the Eighth District that do business in China “tend to be downbeat relative to where they were, and I think that’s probably affecting market sentiment.”

“Still it’s a big economy, it’s a growing economy. There’s a lot going on. Whether you should really be changing equity valuations as much as people are in reaction to sort of slim amounts of data out of China, I think, is kind of questionable,” said the regional Fed chief.

OTHER HIGHLIGHTS
Other highlights of the second quarter GDP report include:

· With the updated estimate for the second quarter, new information shows that nonresidential fixed investment and private inventory investment increased. The July 30 advance GDP report shows that both of these components were estimated to have slightly decreased.

· The increase in real GDP in the second quarter reflected positive contributions from personal consumption expenditures (PCE), exports, state and local government spending, nonresidential fixed investment, residential fixed investment, and private inventory investment. Imports, which are a subtraction in the calculation of GDP, also increased.

· The acceleration in real GDP in the second quarter reflected an upturn in exports, an acceleration in PCE, a deceleration in imports, an upturn in state and local government spending, and an acceleration in nonresidential fixed investment that were partly offset by decelerations in private inventory investment, in federal government spending, and in residential fixed investment.

· Real gross domestic income (GDI) – the value of the costs incurred and the incomes earned in the production of goods and services in the nation’s economy – also increased 0.6% in the second quarter, compared with an increase of 0.4% (revised) in the first quarter.

· The average of real GDP and real GDI, a supplemental measure of U.S. economic activity that equally weights GDP and GDI, increased 2.1% in the second quarter, compared with an increase of 0.5% in the first quarter.

Meanwhile, the GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2015 was 1.4% on Aug.26, up from 1.3% on Aug. 18.