Revised second quarter GDP jumps 3.1%, Fed chief says rate hikes still likely

by Wesley Brown (wesbrocomm@gmail.com) 167 views 

The nation’s economy grew at a solid 3.1% in the second quarter, experiencing the strongest lift in real gross domestic product (GDP) since the first quarter of 2015, according to the “final” estimate released Thursday (Sept. 28) by the U.S. Commerce Department’s Bureau of Economic Analysis (BEA).

The third GDP revision was better than the “second” estimate of 3% last month, and the advance forecast of 2.6% in July. The final second quarter spotlight on the U.S. economy is based on more complete source data than was available for the “second” estimate issued last month, BEA officials said.

A year ago, 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 up in production, adjusted for price changes – increased at a modest 2.1% in the second quarter of 2016.

The second quarter revisions bring the U.S. economic growth in the first half of 2017 to an uncertain 2.1%, equal to the post-expansion from the Great Recession that ended in 2009. A Wall Street Journal survey of more than 60 U.S. economists had forecast robust second quarter growth of 3% after a tepid GDP advancement of only 1.2% in the first quarter.

FEDERAL RESERVE COMMENTS
The GDP report comes one day after Federal Reserve Chair Janet Yellen spoke at the annual meeting of the National Association for Business Economics in Cleveland, where she said the outlook for the U.S. economy “is subject to considerable uncertainty from multiple sources.”

Yellen admitted  the Federal Open Market Committee (FOMC), which sets U.S. monetary policy, will likely continue raising interest rates in the long-run despite weak inflation growth below the 2% target.

“My colleagues and I may have misjudged the strength of the labor market, the degree to which longer-run inflation expectations are consistent with our inflation objective, or even the fundamental forces driving inflation,” Yellen said. “In interpreting incoming data, we will need to stay alert to these possibilities and, in light of incoming information, adjust our views about inflation, the overall economy, and the stance of monetary policy best suited to promoting maximum employment and price stability.”

Yellen added: “In my view, it strengthens the case for a gradual pace of adjustments. Moving too quickly risks over-adjusting policy to head off projected developments that may not come to pass. A gradual approach is particularly appropriate in light of subdued inflation and a low neutral real interest rate, which imply that the FOMC will have only limited scope to cut the federal funds rate should the economy be hit with an adverse shock. But we should also be wary of moving too gradually.”

As expected, the Fed raised interest rates for the second time at the June FOMC meeting, where the central bank also decided to scale back the nation’s $4.5 trillion balance sheets that include government bonds, mortgage-backed securities and other assets purchased to keep the nation’s economy afloat following the financial crisis.

The FOMC has four more meetings this year in which they could adjust the rate, which is set at 1% to 1.25%. Michael Pakko, chief economist and state economic forecaster for Arkansas Economic Development Institute at the University of Arkansas at Little Rock, is among a consensus of U.S. economic forecasters who believe the Fed will raise the federal funds rate to 1.4% by the end of 2017.

CONSUMER SPENDING BOOST
The revised BEA report shows  real GDP growth in the second quarter reflected strong consumer and government spending, an increase in U.S. exports, and a boost in corporate investment and inventory. Those gains were partly offset by negative contributions from residential fixed investment and state and local government spending.

Nationwide, real gross domestic income (GDI) increased 2.9% in the second quarter, compared with a surge of 2.7% in the first three months of 2017. Current-dollar GDP increased 4.1%, or $192.3 billion, in the second quarter to a level of $19.2 trillion. In the first quarter, current-dollar GDP rose 3.3%, or by $152.2 billion.

The BEA will release its “advance” GDP estimate for the third quarter on Oct. 27. On Wednesday, the Atlanta Fed’s GDPNow model forecasted third quarter real GDP growth at only 2.1%, down from 2.2% on Sept. 19. That downgrade came after the National Association of Realtors and the U.S. Census Bureau released housing market data last week showing third-quarter real residential investment growth had declined from -2.6% to -5.2%.

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