US rebounds, edging Fed towards a rate rise in September

Schroders’ Chief Economist and Strategist, Keith Wade and Fixed Income Fund Manager, Lisa Hornby, discuss the latest US GDP figures and its potential effect on the Federal Reserve’s outlook

Keith Wade, chief economist & strategist

“As widely expected, the US economy rebounded in Q2, growing at an annualised rate of 2.3% after a tepid first quarter. The main drivers of growth were a rebound in consumer spending  – which expanded at a robust 2.9% – and a big swing in the contribution from net trade which had been a significant drag in Q1. No doubt the West Coast dock strike played a role in this by distorting trade flows in the first quarter.

Exports picked up smartly in Q2 whilst imports moderated, such that the net trade contribution became modestly positive. The turn in the economy is more impressive once the effect of inventories is stripped out, as real final sales picked up to 2.4% from -0.2%. This is all encouraging news, but unlikely to stir the Federal Reserve (Fed).

Where eyebrows are likely to have been raised is on the inflation side, where we saw a pick-up to a 1.8% annualised rate compared with 1.0% in Q1 on the Fed’s preferred measure; the core personal consumption deflator. Year-on-year, the rate remained at 1.3% and no doubt this information was available to the policymakers at yesterday’s rate setting meeting. Nonetheless, it will have increased their confidence in reaching the medium-term inflation target of 2%.

Along with some further improvement in the labour market, this should keep us on track for a September rate rise. Tomorrow’s Employment Cost Index (ECI) update will be important in this respect, as will signs of stability in commodity markets.”

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