As U.S. Economy Regains Footing, Fed Ponders Next Moves

As Economy Accelerates, Fed Remains Cautious
Scott Olson/Getty ImagesJob seekers at a career fair Wednesday in Chicago.
By MARTIN CRUTSINGER

WASHINGTON -- After a grim start to 2014, the U.S. economy has rebounded with vigor and should show renewed strength into next year.

That was the general view of analysts Wednesday after the government estimated that the economy grew at a fast 4 percent annual rate in the April-June quarter. Consumers, businesses and governments combined to fuel the expansion. The government also said growth was more robust last year than previously estimated.

Whether the healthier expansion will lead the Federal Reserve to raise interest rates sooner than expected is unclear. The Fed offered a mixed message on the economy Wednesday: Growth is strengthening, and the unemployment rate is steadily falling. Yet by some measures, it suggested, the job market remains subpar.

A statement the Fed issued after a two-day policy meeting signaled that it wants to see further improvement before it starts raising its key short-term interest rate. It offered no clearer hint of when it will raise that rate.

Continued Low Interest Rates

Instead, the Fed reiterated its plan to keep short-term rates low "for a considerable time" after ends its monthly bond purchases. The Fed said it will slow the pace of its purchases by another $10 billion to $25 billion a month. The purchases, which have been intended to keep long-term borrowing rates low, are set to end in October. Most economists think a rate increase is about a year away.

The economy sprang back to life last quarter after a dismal winter in which it shrank at a sharp 2.1 percent annual rate. The government upgraded that decline from a previous estimate of a 2.9 percent drop. But it was still the biggest contraction since early 2009 in the depths of the Great Recession.

Last quarter's bounce-back reinforced analysts' view that the economy's momentum is extending into the second half of the year, when they forecast annual growth of around 3 percent.

The government also updated its estimates of growth leading into this year. They show the economy expanded in the second half of 2013 at the fastest pace in a decade and more than previously estimated. The revised data also show that the economy grew faster in 2013 than previously estimated, though more slowly in 2011 and 2012 than earlier thought.

The second quarter's growth in the gross domestic product -- the total output of goods and services -- was the fastest since a 4.5 percent increase in July-September quarter of 2013.

Paul Ashworth, chief U.S. economist at Capital Economics, said that given last quarter's rebound, he's boosting his estimate for growth this year to 2 percent, up from a previous 1.7 percent forecast. Ashworth said the economy's growth also supported his view that the Fed will be inclined to start raising rates early next year.

Ashworth is among a group of economists who think growing strength in the job market and the economy will prod the Fed to move faster to raise rates to make sure inflation doesn't get out of hand. Other economists have been predicting that the Fed would wait until mid-2015 to start raising rates.

What About Wages?

The Fed revised the wording of its previous statement to note that while the unemployment rate has dropped steadily, the job market is still struggling in other ways. It didn't specify what it meant. But Chair Janet Yellen expressed concern to Congress this month about stagnant wage growth, many part-time workers who can't find full-time jobs and the proportion of the unemployed who have been out of work for more than six months.

The GDP report showed that one measure of inflation rose 2 percent last quarter, up from a 1.3 percent rise in the first quarter. The Fed's inflation target is 2 percent, and for two years the GDP measure of inflation has been running below that level. Low inflation has given the Fed leeway to focus on boosting growth to fight high unemployment.

In its statement, the Fed noted that inflation had risen closer to its 2 percent target. The statement said concerns that inflation would run persistently below the Fed's 2 percent target had "diminished somewhat." But it expressed no worries about the slight acceleration in prices.

The economy's sudden contraction in the first quarter coincided with a severe winter that disrupted activity across industries and kept consumers away from shopping malls and auto dealerships. Consumer spending slowed to an annual growth rate of 1.2 percent, the weakest in nearly three years.

Better job growth, a rising stock market, falling gasoline prices -- all those things are starting to resonate on Main Street.

Last quarter, consumer spending accelerated to a growth rate of 2.5 percent. Spending on durable goods such as autos surged at a 14 percent annual rate, the biggest quarterly gain since 2009. Analysts said that was an encouraging sign of consumers' growing willingness to buy high-cost items like cars.

"Better job growth, a rising stock market, falling gasoline prices -- all those things are starting to resonate on Main Street," said Stuart Hoffman, chief economist at PNC Financial Services Group.

Hoffman suggested that five straight months of job gains above 200,000 were buoying both consumer and business confidence. He predicted that the July jobs report, to be released Friday, would show job growth of around 225,000. Hoffman foresees growth of around 3 percent over the next year.

The government's revised estimates going back to 2011 show the economy expanded at an annual rate of 4.5 percent in last year's third quarter, up from a previous 4.1 percent estimate. The growth rate was 3.5 percent in the fourth quarter, up from an earlier 2.6 percent estimate.

For 2013 as a whole, the government said the economy grew 2.2 percent, up from its earlier 1.9 percent estimate.


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COMMON SENSE

Although the number of people who had jobs in the United States increased by 143,000 from November to December, according to the Bureau of Labor Statistics, that still left 1,687,000 fewer Americans holding jobs than held jobs six years ago in December 2007 the month the last recession began. Electricity prices are skyrocketing to all-time highs, according to the government's own official statistics. The Electricity Price Index of the Bureau of Labor Statistics hit an all-time record in November, 20% higher than 6 years ago. That is another loss for the middle class, the poor and further reducing real incomes for everyone.
The years between 2009 and 2012 saw the largest recorded federal government deficits since 1946, based on percentage of the economy. And although the White House also reported that the deficit this year is the lowest of the Obama administration, there is little reason for celebration. Currently, the amount of federal debt is exactly 74 percent of the economy.

Experts now say that trillions of dollars in Fed paper money-printing, a jobless "recovery," and unsustainable levels of record-debt have pushed the U.S. beyond the point of return.

Not a day goes by that Obama is not attempting to defy our laws, remove our rights and Christian Rights, over-ride established procedures, install controversial appointees, enact divisive mandates, and assert a dictatorial form of power. Never has there been a leader of this great land who used such tactics to harm and hurt the people and this country.

August 01 2014 at 8:06 AM Report abuse rate up rate down Reply
mexazuneben

We are 5-6 years into our jobless recovery. And even this tepid recovery shows signs of stalling!

Today's GDP numbers ARE a positive sign, but unfortunately are just not very relevant to the typical American these days.

The combination of Outsourcing, Automation, and Illegal Immigration have decimated the working class and working poor, with no end in sight. Wages can't rise with these headwinds... and if they did then the Fed would immediately raise interest rates to ward off the "wage price spiral" crushing wages again. They think it's ok for Stocks to jump out of control... but wage raises for the plebes is unacceptable!

Just take myself for example - I was laid off in 2010 shortly after the start of the recession. I’m highly skilled in my field, yet have been bouncing around from job to job all making starting salary numbers, despite being 40 years old. Paying my mortgage is a struggle. Paying my health insurance is worse ($375/month from Freelancer’s Union). I am forced to buy cheap bare minimum car insurance ($18/month from Insurance Panda). My daughter is forced to attend a public school that is in increasingly worse condition thanks to illegal children and welfare leeches moving in. Yet here I am, unable to afford a quality education for her.

Federal Reserve monetary policy moves (although necessary) have mainly benefitted Big Business (especially Finance) and speculators, to the detriment of savers. Zero Interest Rate policy and Fed Purchases in the Open Market simply don't help the Average American much. Thus we see a booming Stock Market (which is clearly an echo bubble based on Fed policy and not on macroeconomic data) and we saw a mini echo RE bubble (especially the "luxury rental" segment).

People ask why the Stock Market isn't jumping with today's news. The answer is obvious. It likes the increase in GDP, but it doesn't like the idea that the Fed may need to stop goosing the market. The Fed is trapped with no exit strategy.

There is no Fiscal Policy these days due to Republican intransigence.

We need a drop in REAL unemployment and increased WAGES, and should focus on those.

July 31 2014 at 11:27 AM Report abuse +3 rate up rate down Reply
jdykbpl45

Economy regaining footing? So that is why the market is down.

July 31 2014 at 10:45 AM Report abuse +3 rate up rate down Reply