There were not any major reports on the U.S. economy released this morning so today we will instead take a look at the latest expectations for gross domestic product (GDP) growth in America. First, the Federal Reserve Bank of Atlanta’s GDPNow estimate puts GDP growth at 2.4 percent in Q2. Similarly, the Federal Reserve Bank of New York’s Nowcast model sees second quarter GDP growth at 2.2 percent (and 2.6 percent for Q3). Analysts at investments banks are even more optimistic about Q2 growth, e.g. Merrill Lynch expects that GDP expanded by 2.8 percent last quarter. Any of those estimates, if accurate, would be a solid improvement from the first quarter’s 1.1 percent pace of expansion, and in line with the pattern we have seen over the past few years where economic growth slows down considerably in Q1 and then rebounds in subsequent quarters. We will find out for sure when the government’s first official estimate of second quarter GDP growth is released next week.
Assuming that the economy does indeed recover from the first quarter soft patch, this will make it harder for officials at the Federal Reserve to justify keeping interest rates at historically low levels, especially if no additional overseas risks, e.g. Brexit, arise. Moreover, half of business economists surveyed this month by the Wall Street Journal expect that the Federal Open Market Committee (FOMC) will hike at the December policy meeting, a significant increase from 7.8 percent in the June survey. Nearly a quarter of economists (23.3 percent), though, still expect that the Fed will raise rates in September. Regardless, overall expectations for interest rates have declined considerably compared to earlier this year, and 45 percent of surveyed economists believe that the construction industry in America will continue to benefit in this environment because low interest rates “reduce the costs of financing major projects and the costs of mortgages.” Respondents were also asked about their own GDP expectations for 2016, and the average reported forecast for U.S. economic growth this year was 2 percent. That pace of expansion is seen accelerating to 2.2 percent in 2017. However, survey respondents currently put the odds of a recession occurring in the next 12 months at 22 percent, up from 21 percent in June and more than double compared to a year ago.
Sources: FRBA, FRBNY, Calculated Risk, Merrill Lynch, WSJPost author: Charles Couch