U.S. GDP Growth Disappoints

American economic growth rose at a 2.3% annual rate in the second quarter of 2015, far below expectations.

Economists had expected a 2.9% increase, with strength from resurgent consumption leading the growth. While personal consumption expenditures (PCE) did post a 2.9% annualized increase in the second quarter, it was not enough to offset “negative contributions from federal government spending, private inventory investment, and nonresidential fixed investment,” according to the Bureau of Economic Analysis. The BEA also noted that imports rose, again hurting GDP.

American economic growth rose at a 2.3% annual rate in the second quarter of 2015, far below expectations.

Economists had expected a 2.9% increase, with strength from resurgent consumption leading the growth. While personal consumption expenditures (PCE) did post a 2.9% annualized increase in the second quarter, it was not enough to offset “negative contributions from federal government spending, private inventory investment, and nonresidential fixed investment,” according to the Bureau of Economic Analysis. The BEA also noted that imports rose, again hurting GDP.

Upturn in Exports, Prices

While rose, so did exports, which the BEA highlighted as a strength that helped GDP grow in the second quarter. “The acceleration in real GDP growth in the second quarter reflected an upturn in exports,” the BEA noted, adding that domestic purchases rose 1.4% in the second quarter, possibly as a result of greater demand for goods and services.

The increase in prices may also encourage the Federal Reserve to take a more hawkish stance on interest rates, as many analysts believe the rise in prices is going to accelerate further in the second half of the year, but demand will remain strong as unemployment falls and PCE rises.

Real exports rose 5.3% in the second quarter, a sharp reversal of the 6% decline seen in the first quarter. Imports rose 3.5% in the same period, down from 7.1% in the first quarter.

In addition to stronger exports, demand for goods rose across the board, with durable goods demand rising 7.3% in the second quarter. Nondurable goods rose 3.6%; both categories saw a sharp acceleration from the first quarter. Services, however, saw a 2.1% rise, identical in both quarters of the first half of the year.

FOMC Future Policy

The rise in GDP, although disappointing, has indicated to some that an interest rate rise is inevitable by the end of the year. At the same time, some are beginning to question whether an interest rate rise will come in September—a deadline that the Federal Reserve has never publicly confirmed.

On Wednesday, the Federal Open Market Committee released a statement saying that growth in household spending remains “moderate” and the housing sector continues to improve, but the Federal Reserve remains concerned about “soft” business fixed investment and net exports.

With both indicators improving in the latest GDP report, an interest rate rise seems possible, but the FOMC made no hint of a rise in the short term. Instead, the Fed seems determined to wait for more indicators of economic improvement. “The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term,” the FOMC said in a statement.

Earlier this month a leaked study from the Federal Reserve showed a Fed Funds rate target of 0.35% by the fourth quarter of 2015, representing about a 21 basis point increase of the current Fed Funds rate on the open market.