Daily Management Review

US Second Quarter GDP Sharply Upgraded, US Markets Rebound


08/27/2015




US Second Quarter GDP Sharply Upgraded, US Markets Rebound
Figures released on Thursday indicate that the US economy grew at a faster pace in the second quarter than previously estimated.

The growth in the gross domestic product touched an annualized 3.7% instead of a previously projected growth rate of an estimated 2.3%. The growth rate was even higher than the expectations of the analysts’ who had predicted a 3.2% increase in growth rate.
 
The figures were released by the US Commerce Department.
 
On the other hand, in contrast to an initial estimate of a 0.6% decline, businesses increased investment at a 3.2%. This exceptional turnaround has been attributed to an increased spending on structures such as office buildings which has forced a revision of the business growth rate to 3.1% instead of a 1.6% drop.
 
While corporate profits climbed 2.4% in the second quarter after declining 5.8% in the previous three months, consumer spending was also revised upwards from 2.9% to 3.1%.
 
In the first quarter, the inflation as measured by the PCE index rose by 1.9% which increased to reach 2.2% year-on-year.
 
The core PCE climbed 1.8% year-on-year in the period, up from a 1% increase in the previous three months, except for food and energy, the Commerce Department announced on Thursday.
 
 “Fed chair Janet Yellen has been on a roller coaster ride this week following the Chinese monetary meltdown, but can breathe a sigh of relief following today’s GDP results," said Dennis de Jong, managing director at UFX.com.
 
Analysts viewed the data as signals for a strong positive trend in the US economy and indicate that the economy is in relatively decent health.
 
Analysts are also of the opinion that the strong data released on Thursday also perhaps would defer the expected interest rate hike.

Following the data from the Commerce Department on Thursday, the US markets extended their rally raising hopes that the worst was behind the market.

“Today's GDP data shows that the U.S. economy's fundamentals are strong and are growing despite all the global headwinds," said Brad McMillan, chief investment officer for Commonwealth Financial in Waltham, Massachusetts.

The rise in the stock value in the US indices was further fueled by a statement from the New York Fed President William Dudley on Wednesday claiming that the September rate hike seemed "less compelling". The U.S. Federal Reserve, which meets on September 16-17, has said it will raise rates only when it sees a sustained recovery in the economy.

The near zero rate of interest in the US has been in place for quite some time and has been instrumental in helping the economy recover from the financial crisis of 2008. A hike in interest rates would make debt more expensive which would affect the profit margin of companies. However analysts are of the view that the near zero interest rate scenario cannot go on forever and sometime in the near future the US federal bank would have to hike rates.

The Fed has been dissuaded from announcing a hike due to the present volatility in the market due to the slowdown in the Chinese economy. To gain further clues the timing of a U.S. interest rate hike, investors are keeping a sharp eye on an annual conference starting on Thursday of some of the world's top central bankers in Jackson Hole, Wyoming.

(Sources: www.digitallook.com & www.reuters.com) 






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