US GDP Growth Surges
Alvexo | Aug 27, 2015 11:02AM ET
Today’s second estimate of second-quarter GDP reflects a strengthening US economy, which has experienced a dramatic uptick in growth in stark contrast to the lackluster first-quarter results. After the first quarter number was double-seasonally adjusted to 0.60%, today’s 3.70% expansion represents a substantial revision higher compared to the first estimate of 2.30% revealed at the end of July.
With the Federal Reserve emphasizing the data-dependent nature of its policy decisions, today’s GDP reading might provide the necessary push to start preparing for an adjustment sooner rather than later. While September has largely been dismissed despite still being the potential liftoff date, it raises the specter of a hike in October should conditions in the economy continue to improve at the current pace. However, the headline number reflects some weaker underlying numbers that might not accurately depict the state of the economy. For instance, a portion of today’s gains in GDP were derived from builds in business inventories, which could reflect channel stuffing and not actual sales. One area this is evident is the wholesale inventories-to-sales ratio, which continues to climb into recessionary territory.
The one bright spot was the pickup in exports, which managed to grow despite the headwinds of a stronger US dollar and better-than-expected personal consumption expenditures. When combined with reduced imports and government spending, the latest uptick is another feather in the cap of the Federal Reserve, providing an optimistic data point that enables the Fed to respond to growing pressure to normalize monetary policy. The reaction to the news fueled additional momentum higher in the US dollar following a recent retreat attributed to reduced liftoff anticipation. The dollar is now on track for three-straight sessions worth of gains following the substantial pullback that transpired over the previous few months following the single-currency index hitting the strongest level since 2003 back in March. A correction in precious metals has continued on the back of dollar strength and other haven flows such as the recent appreciation in the Swiss franc have also similarly reversed. Moreover, the “data dependent” Federal Reserve will be forced to rethink its position and commitment to normalizing policy, setting the stage for a possible shift in rates in coming months.
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