Investments

Experts revise GDP rates, in different directions

But they agree on one thing: The Fed will raise rates this year

Crystal ball

Capital Economics and Goldman Sachs both just revised their U.S. Gross Domestic Product growth predictions, but in different directions. While Capital Economics revised up slightly, Goldman Sachs revised their predictions slightly down.

The shocking Brexit vote has many experts recalculating economic growth in the next few months.

Goldman Sachs previously predicted GDP growth at 2.25% but the company has revised its prediction down to 2% for the year. It also predicts that the Fed will raise rates just once this year, instead of its previous prediction of twice.

On the other hand, Capital Economics claims that the Fed will raise rates faster than the markets currently expect. In fact, they say that by the end of next year, rates could increase at least 1.75% to 2%.

Capital Economics points out that while there was a slowing to below 1% in the first quarter for GDP growth, data suggests that it rebounded to between 2.5% to 3% in the second quarter, and the company continues to predict a rebound for the rest of the year.

While they may disagree about GDP growth, both companies continue to predict that the Fed will raise rates this year, assuming a few key factors fall into place.

In order for the Fed to raise rates the labor market will also need to rebound from May’s shockingly low payroll employment, according to Capital Economics.

Goldman Sachs adds other factors for the economy to continue growing, including:

1. Improvement in timely data on growth. There will need to be a meaningful improvement in the June dataset in order to confirm that activity is not decelerating.

Click to Enlarge

GDP

(Source: Goldman Sachs Global Investment Research)

2. No increase in layoffs. Cyclical downturns are usually marked by a pickup in layoff activity, often captured first by rising weekly claims for unemployment insurance benefits. These measures need to remain low in order to confirm that labor market trends are not worsening.

Click to Enlarge

GDP

(Source: Goldman Sachs Global Investment Research)

3. Only moderate tightening of financial conditions. If the changes seen last Friday, an increase in the Financial Conditions Index by 27 basis points, and today by 10 basis points, prove persistent, the tightening of financial conditions could subtract about 25 basis points from GDP growth over the next year.

Click to Enlarge

GDP

(Source: Goldman Sachs Global Investment Research)

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