As the world anticipates the Federal Reserve raising interest rates at its final FOMC meeting in December, the Bureau of Economic Analysis (BEA) announced that the nation’s real gross domestic product (GDP) grew at an annualized rate of 2.1 percent in its second of three estimates for the third quarter released Tuesday.
The Fed has repeatedly stated it will not raise the federal funds target rate from near zero, where it has been since 2008, until it sees sufficient economic growth. The GDP grew at a solid rate of 3.9 percent in Q2 but the Fed still did not raise rates.
In the advance estimate for Q3 released last month, GDP grew at a rate of 1.5 percent. The rate increase from the advance estimate to the second estimate was largely due to “positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, state and local government spending, residential fixed investment, and exports that were partly offset by a negative contribution from private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased.”
A survey of 58 Wall Street Journal economists conducted in November showed a predicted median GDP growth of 1.5 percent for the third quarter, with a low of 1.1 percent and a high of 2.1 percent. That same group predicted median growth of 2.7 percent, with a high of 4.5 percent and a low of 1.5 percent.
Anticipated growth in the GDP rate combined with a solid jobs report for October that beat job creation expectations by 50 percent (271,000 has caused widespread prediction that the Fed will finally raise rates in December. Barring a less-than-stellar employment summary for November, which will be released on December 4, analysts expect the Fed will make the leap.
“We really only have one more hurdle to go (the November employment summary), and unless something unforeseen occurs, I think it’s a pretty good bet that the Fed is going to raise rates in December,” said Curt Long, Chief Economist for the National Association of Federal Credit Unions.
Despite the increase in the rate of GDP growth from the advance estimate to the second estimate in Q3, the news is not all good, according to the National Association of Home Builders’ Assistant VP for Forecasting and Analysis Robert Denk.
“Despite the higher growth headline number, 2.1 percent, major sectors of the economy slowed from last quarter and the correction to inventory investment that we thought was behind us is now in front of us and will pull down the growth numbers next quarter,” Denk wrote on the NAHB’s Eye on Housing Blog. “Stepping back, there are positive notes to the report: PCE, while slower than last quarter, remains strong; fixed investment slowed but hasn’t collapsed; government spending is adding to rather than subtracting from growth. The recovery from the Great Recession continues and the weakness of this report isn’t a major setback, but the upside-down nature of these revisions confounds interpretation; it’s not what it appears, it’s curiouser and curiouser.”