Finance Dominates U.S. GDP Growth
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Finance and insurance is seeing the largest increases in its contribution to America’s GDP, largely due to more Federal Reserve banks and use of credit in America and in foreign markets.
Finance and insurance saw a 12.4% increase in its value as a contribution to GDP in the second quarter of 2015 after falling 3.8% in the first quarter. The Bureau of Economic Analysis attributed the growth to “an increase in Federal Reserve banks, credit intermediation, and related activities.”
Finance and insurance is seeing the largest increases in its contribution to America’s GDP, largely due to more Federal Reserve banks and use of credit in America and in foreign markets.
Finance and insurance saw a 12.4% increase in its value as a contribution to GDP in the second quarter of 2015 after falling 3.8% in the first quarter. The Bureau of Economic Analysis attributed the growth to “an increase in Federal Reserve banks, credit intermediation, and related activities.”
Other professional services also made a large contribution to America’s GDP, rising 7.6% in the second quarter. This category includes scientific, technical, and professional services including industries like architecture, engineering, research and development, and consulting. This sector has seen a steady increase in value throughout 2015, while other sectors have been more uneven in their growth.
Household Spending, U.S. Dollar
Converging trends such as dollar repatriation and greater fears of defaults abroad due to declining commodity prices have encouraged a rise in demand for American financial services from foreign entities, partly offsetting a decline in exports of goods and other services.
As a result, the U.S. trade deficit has declined slightly, with the gains increasingly accruing to financial firms.
The rising value of the U.S. dollar, which has caused exports to fall and stockpiles of inventories to decline, also hits exporting firms. Offsetting this was household spending, which rose 3.2% in the second quarter.
Many analysts are expecting another hit for exporters and U.S. manufacturers by a rising dollar if the Federal Reserve increases its Federal funds rate in December. Many economists lambasted the anticipated rate hike and warned that several deflationary indicators, such as falling labor participation, make it unwise to raise rates against these trends.
Inevitable Rate Hike
Some analysts have argued the Fed has “backed itself into a corner” by ratcheting up rhetoric about a looming rate hike in the short term.
Fed analyst and University of Oregon Professor Timothy Duy recently wrote that a Fed rate hike is becoming likelier even as it is counterproductive. “Quite frankly, regardless of whether you think they should hike rates, if they don’t hike rates, the divergence between what they say and what they do would become truly untenable from a communications perspective,” he wrote this weekend.
The impact of a rate hike remains uncertain, but Duy argues the move would carry great risks for America’s economy because of persistent low growth and productivity gains at home and worldwide. “How much Fed tightening can the US sustain in a world driven by the zero lower bound globally? Such concerns are generally downplayed by Fed officials; that lack of concern is something I view as a key risk,” he said, adding that the debate has become “whether they waited too long” to raise rates.
