May 18, 2015 / 5:09 PM / in 2 years

U.S. economy isn't as weak as estimates suggest, Fed paper says

Cargo containers sit at the Port of Los Angeles in Los Angeles, California, in this file photo taken February 18, 2015. REUTERS/Bob Riha, Jr./Files

SAN FRANCISCO (Reuters) - The U.S. economy is probably not as weak as current estimates suggest, a paper published Monday by the Federal Reserve Bank of San Francisco said, potentially adding to arguments for raising interest rates sooner rather than later.

A government report late last month put first-quarter growth at a mere 0.2 percent, far below economists’ expectations and uncomfortably close to an outright contraction like that experienced in the first quarter of 2014.

But by running a series of statistical corrections for the way the government accounts for seasonal variations in output, the paper’s authors found “a good chance that underlying economic growth so far this year was substantially stronger than reported.”

A chart in the paper suggested first-quarter growth may have been closer to 1.8 percent. That’s still below the economy’s potential but not dramatically so.

A stronger economy suggests a lower hurdle for the Fed to raise interest rates that have been near zero since December 2008.

San Francisco Fed President John Williams, whose chief research economist co-authored Monday’s paper, has said he believes the economy will bounce back this quarter and may be strong enough for the Fed to begin raising interest rates even as soon as June.

The paper’s conclusions are at odds with the findings published last week by economists at the Washington-based Federal Reserve Board. They argued that the recent pattern of first-quarter economic slowdowns isn’t a reflection of a statistical fluke in the way U.S. gross domestic product is measured.

Reporting by Ann Saphir; Editing by Bernadette Baum

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