Fed Cautions Rate Hike As US GDP Grew Slower Than Expected

151204_INV_InterestRatesApproaching the final stretch of the year, the US economy continues to grow very slowly. For the third straight quarter, growth has only tiptoed forward, raising yet more concern over the ability for the US economy to recover. In fact, many are now questioning the possibility of another recession as business investment failures further offset strong consumer spending.

According to the United States Department of Commerce, the US gross national product—this is the value of goods and services produced within the country—increased at the seasonally adjusted rate of only 1.2 percent in 2016 Q2. Some economists had forecast growth at more than double this—2.6 percent—so it is obvious that the economy is definitely not growing fast enough. There is yet more evidence to support this, though, as Q4 estimates were revised from 1.4 percent to 0.9 percent and 0.8 percent from 1.1 percent in Q1.

On the bright said, perhaps, growth from 2012 to 2015 was revised up to 2.2 percent from 2.1 percent but, of course, that revision cannot compensate the dramatic downward slope of the past year. While the rate does match the modest pace of the seven-year (so far) recovery, the economy continues to expand at about 50 percent of this pace over the past year.

Indeed, it is unfortunate that while consumer spending is strong—and, more importantly, appears to be getting stronger—the report seems to suggest that the Federal Reserve is looking for yet more sustained and consistent improvement. Indeed, businesses are cutting back on their large investments and aggressively reducing their stock with weaker global markets that are holding back the increasingly stronger dollar.

Accordingly, Deutsche Bank Securities Inc chief US economist Joseph LaVorgna comments, “We’re just muddling through; Consumer spending looks good, but the problem is that the rest of the economy is soft. The economy remains vulnerable to downside risks. The Fed is right to be cautious.”

So what does that mean for the rest of us?

The good news is that the dollar is getting stronger and that the Fed is paying attention. While they are being cautious, that cautious is more an awareness of unstable foreign markets and not necessarily poor growth at home. It does mean that we may have to wait a little longer for interest rates to rise but, if things remain—at the very least—consistent here in the US, it is only going to be a matter of time.

 

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