‘Second’ GDP estimate disappoints with 1.1% growth, Yellen makes case for interest rate rise

Real gross domestic product (GDP) crept forward at an annual rate of 1.1% in the second quarter with corporate profits well off the first three months of 2016, according to the “second” estimate released Friday (Aug. 26) by the Bureau of Economic Analysis.

The disappointing GDP report came just hours ahead of Federal Reserve Chair Janet Yellen’s market opening speech where she made a case for raising interest rates in the near term, although not offering a specific timetable.

Speaking at a Federal Open Market Committee meeting on the U.S. economy and the Fed’s monetary policy at a gathering of central bankers at Jackson Hole, Wyo., Yellen said the Fed expects moderate growth in real gross domestic product (GDP), additional strengthening in the labor market, and inflation rising to 2% over the next few years.

“Based on this economic outlook, the FOMC continues to anticipate that gradual increases in the federal funds rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives,” Yellen said at the FOMC symposium. “Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months. Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee’s outlook.”

Still, Yellen gave the Fed board some wiggle room in the economy goes awry.

“And, as ever, the economic outlook is uncertain, and so monetary policy is not on a preset course. Our ability to predict how the federal funds rate will evolve over time is quite limited because monetary policy will need to respond to whatever disturbances may buffet the economy,” said the Fed chairwoman. “In addition, the level of short-term interest rates consistent with the dual mandate varies over time in response to shifts in underlying economic conditions that are often evident only in hindsight.”

Kansas City Fed President Esther George told CNBC on Thursday that she may vote in favor of gradually raising interest rates at the next meeting of federal monetary policymakers. Several Wall Street analysts have predicted that Yellen and the Federal Open Market Committee will raise interest rates before the end of this year.

The new GDP report, which is based on more complete source data than were available for the first “advance” estimate, is one percentage point below last month’s approximation of real GDP of 1.2%.

PRESIDENT OBAMA PUSHES FOR TRADE DEAL
In response to the lukewarm second quarter GDP, the Obama administration took to the president’s White House blog to explain the tepid economic expansion and take another opportunity to push Congress to pass the landmark Trans-Pacific Partnership.

“The economy grew 1.2% at an annual rate in the second quarter of 2016, due in part to a large decline in inventory investment (one of the most volatile components of GDP), along with declines in business investment, residential investment, and government spending,” the White House said. “(This) report underscores that there is more work to do, and the President will continue to take steps to strengthen economic growth and boost living standards, including promoting greater competition across the economy; supporting innovation; and calling on Congress to increase investments in infrastructure and to pass the high-standards Trans-Pacific Partnership.”

Despite the Obama administration’s explanation, the second of three estimates by the Department of Commerce’s BEA research group came in well below the Atlanta Fed’s original GDPNow forecast of 1.8% of 2.3% economic growth for the second quarter.

Real gross domestic product – the value of the goods and services produced by the nation’s economy less the value of the goods and services used in production, adjusted for price changes – grew at a weak 0.8% in the first quarter of 2016, slightly better than the revised tepid growth of only 0.8% in the first three months of 2016.

According to the BEA, real gross domestic income (GDI) increased 0.2% in the second quarter, compared to a revised increase of 0.8% 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 0.6% in the second quarter, compared with an increase of 0.8% in the first quarter.

PERSONAL CONSUMPTION RISES
Commerce Department officials said the rise in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE) and exports that were partly offset by negative contributions from private inventory investment, residential fixed investment, state and local government spending and nonresidential fixed investment.

The acceleration in real GDP in the second quarter primarily reflected an acceleration in PCE, a smaller decrease in nonresidential fixed investment, an upturn in exports, and a smaller decrease in federal government spending. These were partly offset by a larger decrease in private inventory investment and downturns in state and local government spending, in residential fixed investment and imports.

Current-dollar GDP increased 3.4%, or $154.9 billion, in the second quarter to a level of $18.43 trillion. In the first quarter, current dollar GDP increased 1.3% percent, or $58.9 billion. The price index for gross domestic purchases increased 2.1% in the second quarter, compared with an increase of 0.2% in the first. The PCE price index increased 2.0%, compared with an increase of 0.3%. Excluding food and energy prices, the PCE price index increased 1.8%, compared with an increase of 2.1%.

Profits from current production, which includes corporate profits with inventory valuation and capital consumption adjustments, decreased $24.1 billion in the second quarter, in contrast to an increase of $66.0 billion in the first quarter of 2016.

Profits of domestic financial corporations increased $7.2 billion in the second quarter, compared with an increase of $8.1 billion in the first quarter. Profits of domestic nonfinancial corporations decreased $58.2 billion, in contrast to an increase of $84.8 billion.

According to the BEA, the “third” and final estimate for GDP growth in the second quarter will be released on Sept. 29. The Atlanta Fed’s GDPNow is now forecasting a robust expansion of 3.4% for the third quarter.