Stronger U.S. second quarter growth backs case for Fed hike

Fri Sep 25, 2015 11:19am EDT
 
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WASHINGTON (Reuters) - The U.S. economy expanded more than previously estimated in the second quarter on stronger consumer spending and construction, backing the case for an interest rate rise before the end of the year despite data sounding a note of caution for September.

The Commerce Department said on Friday gross domestic product rose at a 3.9 percent annual pace in the April-June quarter, up from the 3.7 percent pace reported last month.

The data supports the case that the U.S. economy may be gaining enough strength to withstand an increase in benchmark interest rates from record low levels despite growing concerns about the global economy.

Still, many economists are expecting a cooler pace of growth in the third quarter, a view bolstered by separate data showing slower growth in services and a drop in consumer sentiment in September.

The U.S. Federal Reserve last week held off on hiking rates, but Fed Chair Janet Yellen kept the door open to an increase this year in a speech on Thursday night, as long as inflation remains stable and growth is strong enough to boost employment.

"There are a lot of things to like about the domestic side of the economy for the second half of the year despite all the global malaise," said Jacob Oubina, senior economist at RBC Capital Markets in New York. "If the domestic economy holds in there, (Fed policymakers) are going to hike in December."

Second-quarter growth, which beat expectations in a Reuters poll for the third GDP reading to be unchanged at 3.7 percent, was bolstered by higher consumer spending, mainly on services like healthcare and transport.

Treasury debt prices extended losses and the dollar hit a fresh five-week high against a basket of currencies on the second-quarter figures, although U.S. stock index futures pared some gains after the September data was released.

The preliminary Purchasing Managers Index for the services sector from Markit slipped to 55.6 in September from the final 56.1 reading in August. A reading over 50 signals expansion in economic activity.   Continued...

 
A man pushes his shopping cart down an aisle at a Home Depot store in New York, July 29, 2010. REUTERS/Shannon Stapleton