Updated GDP and Economic Outlook
An update on GDP was released this morning by the Commerce Department and the U.S. Economy grew at a revised rate of 1.1%, slightly lower than the 1.2% initially reported for the Second Quarter 2016. Wall Street economists forecasted GDP figures ranging from 0.9-2.8% for this release. Consumer spending was revised higher but it was not enough to offset lower government spending and larger depletion of inventories versus the initial estimate. This latest estimate is the second of three releases, with the final figures coming in late September. Still, despite the slightly lower revision, we expect the economy to pick up in the second half of 2016.
As we discussed in a previous blog, personal consumption, a broad measure of consumer spending, had its best quarterly gain since the end of 2014 and those figures were revised higher. In addition, the report included an upward revision to wage and salary data, which we believe is supportive of consumer spending into the second half of the year. Furthermore, real GDP, which excludes volatile components of inventories, trade and government spending, was revised higher in this release. Therefore, we continue to believe the weak GDP figure for the quarter is temporary.
This revised report does not provide clues as to whether the Federal Reserve may raise rates sooner than expected. A higher revision could have made the case easier for the Federal Reserve to raise interest rates in September, which the market is currently pricing in an approximate 30% probability. Still, several Fed officials have made statements within the past week that the economy is strong enough to support higher interest rates. In addition, Janet Yellen echoed this sentiment in a statement released today from the annual gathering of central bankers in Jackson Hole, Wyoming. She believes the case for increasing rates has strengthened in recent months, due to the labor market and their outlook for economic activity and inflation.
More recent economic data, such as the July reports for labor market, durable goods orders and housing starts, have come in stronger than expected and support higher second half growth. We will continue to monitor economic data, but this GDP estimate has not altered our expectations for a pace of steady economic growth as we head into the second half of 2016. Our belief is supported by a strengthening labor market with a steady improvement in wages. Also, factors such as low oil prices and a strong US dollar weighed on corporate profits earlier in the year. These have since subsided and should no longer be headwinds to higher profitability in the second half of the year.