U.S. GDP bodes well for rate hike

WASHINGTON – The U.S. economy isn’t moving at warp speed, but it looks like it will be strong enough to handle an expected interest rate increase later this year.

Fueled by solid consumer spending, Thursday’s report on the gross domestic product underscored the steady growth that is likely to bolster the Federal Reserve’s case that it will soon be time to make a move, perhaps in September.

The economy’s total output of goods and services rebounded to a respectable annual rate of 2.3 percent in the April-June quarter, the best showing since last summer. Moreover, the first quarter managed to grow a slight 0.6 percent, reversing an earlier government estimate of a contraction.

“The fact that the economy improved meaningfully in the second quarter and is likely to strengthen further in the current quarter should keep a September rate hike on the table,” said Sal Guatieri, senior economist at BMO Capital Markets.

While the latest figures fall short of a boom, the United States appears in better shape than other major economies of the world. China – the world’s second-biggest economy – has seen a sharp drop in stock prices recently. Meanwhile, Europe has been consumed with resolving a stubborn debt crisis in Greece.

The International Monetary Fund is forecasting that the 19 nations that use the euro currency will grow a modest 1.5 percent this year. It expects China to expand 6.8 percent, which would be the slowest growth rate for the country in 25 years.

In the United States, economists are hopeful that the 1.5 percent average growth from January through June will double in the second half of this year to around 3 percent.

The optimism stems from projected trends in consumer spending, which should strengthen further in coming months thanks to robust job gains. Unemployment hit a seven-year low in June, but the Fed says it wants to see more. It remains concerned about wage growth and the number of part-time workers unable to find full-time jobs.

The Fed also needs to be convinced that price gains will eventually rise toward its target of 2 percent a year. Inflation has been running well below that level for some time.

The GDP report did offer some encouragement on the inflation front. A price measure tied to GDP rose at an annual rate of 2.2 percent in the second quarter. Excluding food and energy costs, the price index rose by 1.8 percent, up from 1 percent gains in the two previous quarters.

While the GDP report provided support for the Fed’s march toward higher rates, economists cautioned that a hike at the Sept. 16-17 meeting is by no means a certainty. It will depend largely on incoming data between now and then, including two jobs reports and a revision to Thursday’s GDP estimate.

“Data over the next two months retain their primary position in the decision process,” said Joel Naroff, chief economist at Naroff Economic Advisors.

While many analysts peg September for a rate hike, others aren’t so sure.

They contend that it may take longer for the Fed to see the improvements it seeks, delaying the first rate hike until as late as December. Fed Chair Janet Yellen has emphasized in recent appearances that if the economy improves as she expects, a rate increase will happen before the end of this year.

The current recovery from the recession of 2007-09 has been the weakest of any expansion since World War II. Revised data released separately Thursday showed even more weakness than previously believed.

The modest performance has raised concerns that the U.S. economy has entered a period of historically slow growth. The nation’s workforce is growing at a weaker pace, and employees are less efficient than before the recession, government data show. Those trends could restrain future economic growth.