The Strategist

Promising second quarter results boost U.S GDP


07/31/2015 - 04:50



A host of factors including the cheap price of oil have played a key role in boosting the U.S. GDP.



With the second quarter results coming in and with the increase in consumer spending along with the housing sector picking up momentum, U.S economic growth is likely see some acceleration and offset the drag from the energy and the trading sectors. A steady forward momentum in economic growth could see the Federal Reserve hike up the interest rates later this year.
 
The U.S government is also expected to report an increase in its Gross Domestic Product (GDP) by 2.6%. However some elements of doubts have crept in since the government has adjusted some of the components that make up the GDP, which economists said left residual seasonality in the data. This effectively means that the earlier report of the GDP shrinking by 0.2% could be revised because of new data streams.
 
"We expect a decent bounce back, which will suggest that the economy's struggles at the start of the year were temporary. GDP growth north of 2.5 percent is sufficient to reduce the slack in the broader economy," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.
 
The Federal Reserve has described the economy as expanding "moderately". It sees the labor market as improving and as for the housing sector it says it shown "additional" improvements. The Federal Reserve has left all option on the table for a possible hike in interest rates in September which would be the first rise since 2006.
 
 
A BOOST IN CONSUMER CONFIDENCE
Cheaper gas prices since late 2014 are likely to have fed increased consumer spending also with the labor market becoming stronger, consumers have had the financial strength to loosen their purse strings. As a result, consumer spending which accounts roughly for more than two-thirds of economic activity, has shot up from 2.1 in the first quarter to 2.9 in the second.
 
"The upshift in growth momentum should be sustained during the second half of the year. This will provide the necessary cover for the Fed to raise rates later this year, though the pace of tightening will be 'gradual,'" said Millan Mulraine, deputy chief economist at TD Securities, New York.
 
 
Further, the housing market which had nearly collapsed earlier, has now greatly recovered. Its recovery and strengthening has expectedly supported economy growth in the second quarter. Naturally, government spending has also helped.
 
The energy sector however, has acted as a drag on the economy. Having spent billions, the fall of crude oil prices which have plunged by more than 60%, compared to prices from last year, have negatively affected companies such as Halliburton and Schlumberger. However, as per U.S energy data, 21 oil rigs have been installed which could be early signs of recovery in the energy sector.
 
Schlumberger reported last week that it believed that its total North American rig count is likely to bottom out and that may open up a slow rise in oil drilling and completion activities of the same, during the second half of this year.
 
 
Another component that is acting as a hindrance to growth is the strength of the dollar which is continuing to hobble exports in the second quarter. At the same time it is favoring the imports of goods in order to meet consumer demand. This is likely to widen trade deficits and act as a hindrance to the growth of the GDP.
 
Source: Reuters.com