US growth rebounds strongly but Fed sticks to policy

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WASHINGTON, D.C.: The US economy rebounded vigorously in the second quarter, growing at a peppy 4.0 percent pace that erased the impact of the sharp winter contraction, the Commerce Department reported on Wednesday (Thursday in Manila).

But the Federal Reserve remained cautious, sticking to its dovish stance after a two-day monetary policy meeting, still seeing some latent weakness that requires keeping interest rates low for the foreseeable future.

The initial estimate of second-quarter growth was far better than expected and showed solid recovery in private investment and consumer spending, especially on durable goods like cars and appliances.

In addition, government spending, which dragged on gross domestic product for the last six quarters, added to the expansion.


That suggested that the severe weather and a modest slump in confidence between December and March were indeed behind the winter slowdown, as economists have said.

But the fresh data, which included upward revisions for the past year, also showed the economy generally has more momentum than earlier thought.

The Commerce Department said the January-March contraction was only 2.1 percent, compared to the more severe 2.9 drop percent previously reported, and it upped its estimate of growth in 2013 to 2.2 percent from 1.9 percent, due to a much stronger second half.

“This is not just a case of better weather. There is evidence to indicate that there has also been an underlying improvement in the economy, and that robust growth will be sustained into the third quarter,” said Chris Williamson, chief economist at Markit.

Fed still sees weakness
The fresh data supported the rise in calls for the Fed to move more quickly to address allegedly overheated asset markets, the growth in risky investment, and a pickup in inflation.

So-called hawks worried about inflation say the central bank’s Federal Open Market Committee needs to accelerate its plans to raise the benchmark federal funds rate up from near-zero only in the second half of next year.

Indeed, one FOMC member dissented from Wednesday’s policy decision, saying its open-ended commitment to the ultra-low rate “does not reflect the considerable economic progress that has been made,” including the sharp fall in joblessness and the pickup in prices.

The committee as expected said the economy was strong enough to further reduce its monthly bond purchases by $10 billion to $25 billion a month. The program, which was at $85 billion last December, is slated to wind up in October.

On the fed funds rate, though, the FOMC took the view that the ultra-low rate remains necessary to support growth.

The statement reflected continued disappointment with the state of the jobs market, saying that various data “suggests that there remains significant underutilization of labor resources.”

Still, in a significant shift, the FOMC dropped its previous expression of concern about low inflation.

“The committee sees the risks to the outlook for economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below two percent has diminished somewhat,” it said.

“The Fed is acknowledging the recent acceleration in consumer price inflation in recent months,” said Paul Edelstein, an economist at IHS Global Insight.

“If inflation continues to rise, then the Fed’s new language could presage an earlier rate hike than anticipated.”

But Edelstein pointed to a key issue that remained unresolved in the GDP data: whether household earnings are gaining, which would feed into higher consumer
spending.

The surge in hiring over the first half of the year, averaging 231,000 new positions each month, has pushed the unemployment rate down to 6.1 percent, where the Fed expected it would be only at the end of 2014.

That, and slower layoffs, should tighten the jobs market and push up wages, but so far wage gains in the recovery have been tepid.

“Until we see wage growth firm, we will continue to question whether consumer price inflation will increase much further,” said Edelstein.

AFP

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