Economy Rebounds In Second Quarter, But Weakness Remains
The economy rebounded from it's winter shock, but it still doesn't seem strong enough to justify the Federal Reserve's plan to raise interest rates.
After another dismal first quarter in which the economic growth actually turned slightly negative, the first release of the second quarter’s Gross Domestic Product numbers seems to indicate that things got better after the weather warmed up:
The American economy regained its footing last quarter, expanding at an annual rate of 2.3 percent amid a better trade picture, growing consumer spending and a resilient housing sector.
The rebound in April, May and June was largely expected, after a dismal performance in the first quarter of 2015, when the economy actually contracted slightly.
Before the report on Thursday from the Commerce Department, analysts on Wall Street had been expecting to see a growth rate of about 2.5 percent for the second quarter.
Although hardly exceptional by the standards of the 1990s or even compared with the 5 percent burst of growth in the summer of 2014, the pace of expansion is largely in line with the trajectory of the recovery, which began exactly six years ago.
And if it continues at the same pace in the coming months, the economy’s underlying momentum means the Federal Reserve is likely to begin its long-awaited move to raise interest rates from historic lows by year end.
On Wednesday, Fed policy makers issued an upbeat assessment of the economy’s progress after concluding a two-day meeting. But they left interest rates near zero, where they’ve been since late 2008, when the recession and financial crisis reached a nadir.
Most experts are looking for a move by the central bank this year, although opinion is divided over whether that means an increase when Fed policy makers next meet in September, or at their final meeting of the year in December.
As for the last quarter, much of the improvement in the economy came from a better trade balance, especially in terms of exports.
Hammered by a one-two punch from a stronger dollar and then a labor slowdown at West Coast ports, net exports reduced growth by nearly 2 full percentage points in the first quarter of 2015 and by 1 percentage point in the fourth quarter of 2014.
That was the worst two-quarter trade performance since 1998, according to a report by Morgan Stanley, but as the ports began functioning normally again this spring and the dollar stabilized, the drag from trade seems to have eased.
In addition to the impact on the headline growth numbers, the trade balance will also be watched by experts who want to gauge the degree by which economic distress overseas is affecting American exporters.
Once again, it appears that the downturn that we saw in the first quarter of the years was an anomaly related to winter weather rather than an indication of a developing trend. The downturn from January through March of this year wasn’t as bad as it had been in 2014, of course, when the economy shrank by 3%, but the underlying reasons behind what happened appear to be the same. What seems to have happened in both cases is that bad weather combined with an economy that, while it continues to grow, still has elements of weakness and vulnerability that lead to downturns from something as largely predictable as the weather. We’ve had rough winters in the past, even in the recent past, but it’s only been in recent years that we’ve seen those winters have such a dramatic impact on economic growth that they actually end up causing the economy to contract when it should be expanding. That suggests that, notwithstanding the fact that the economy is growing at 2.5% to 3% rate, there are still underlying weaknesses that make it vulnerable to economic shocks. That last point is relevant because of the potential impact of the financial downturn currently gripping China on the American economy given the size of our export markets, but it may not be until well into the third quarter before we know what if any impact those events may have here at home.
Given all of this, the Federal Reserve’s current policy seems somewhat puzzling. Based on the statements released today, as well as other recent statements, it seems clear that the Federal Reserve is on track to raise interest rates at some point before the end of the years. Given the fact that rates have been near zero for some time now, it is inevitable that they are going to be raised at some point, but it’s unclear why that has to happen now. There doesn’t seem to be any evidence of inflation at the consumer or wholesale level, the employment reports over the past few months have shown that there is still a lot of slack in the labor market, and the past two years have shown that the economy is vulnerable to economic shocks from the weather, which is a factor that it has usually been able to absorb in the past. Taking all of that into account, I’m not entirely convinced of the wisdom of slowing the economy down by raising interest rates even slightly. Obviously, the Fed is concerned with keeping the economy growing at a healthy pace without stirring up inflation, and that’s a proper goal for them to aim at. At the same time, though, the fear of inflation seems so wildly out of place at the moment, and the economy still seems so vulnerable, that I’m not sure that the “inflation hawk” strategy is the right way to go.