GDP Growth Finally Picks Up
Gross domestic product (GDP) in the U.S.—a measure of how many goods and services make up the U.S. economy—caught investors by surprise in the third quarter, rising 2.9% and all but confirming that the Federal Reserve will raise interest rates before the year’s end.
After adjusting for seasonal anomalies and inflation, GDP showed stronger growth than most economists expected. Those polled by The Wall Street Journal predicted an average of 2.5% GDP growth which, in any case, would have been well above the 1.4% clocked in the second quarter. The U.S. economy hasn’t expanded this rapidly in more than two years, making it a milestone in the recovery. (Source: “U.S. Economy Roars Back, Grew 2.9% in Third Quarter,” The Wall Street Journal, October 30, 2016.)
Although consumer spending was a little subdued, the overall numbers got a boost from big jumps in exports and inventories.
Analysts believe that the growth is simply a delayed response to stumbles earlier in the year, when output was depressed by a slew of external shocks, such as the stock market crashes in China, the terrorist attacks in France, or Britain’s referendum to leave the European Union.
But with those events squarely in the rearview mirror, businesses have ramped up investment and production. The gains were also a surprise to economists because there is usually a lull before presidential elections, and this year’s contest has been particularly unsettling.
Nonetheless, business conditions have continued to improve in the U.S., paving the way for the Fed to raise interest rates. In fact, the odds of a 2016 rate hike are now above 75%.
The central bank first raised interest rates last December, after seven years of historically low yields. It intended to follow up with a second increase in the first half of 2016, but there were too many headwinds pushing back global economic growth.
As a result, the appointed hour was pushed to later in the year. Since we are fast approaching the end of the year, and the Fed has repeatedly said its decision will hinge on economic data, many analysts think that the positive GDP numbers ensure a rate hike in December.