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Could GDP growth lead to interest rate hike next week?

Came in higher than expected, but…

US economy

Real gross domestic product increased higher than experts expected, leading some experts to speculate that an interest rate hike next week is not out of the question.

Real GDP increased at an annual rate of 2.9% in the third quarter, according to the advance estimate from the U.S. Bureau of Economic Analysis. This is compared to the second quarter’s paltry growth of 1.4%.

Today's rate is the most growth for the economy in the last two years.

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GDP

(Source: U.S. Bureau of Economic Analysis)

This is only the first estimate, and is based on source data that is incomplete or subject to further revision by the source agency. The second estimate will be based on more complete information, and will come out at the end of November.

This increase reflected an improvement in personal consumption expenditures, exports, private inventory investment, federal government spending and nonresidential fixed investment. They were partially offset by decreases in residential fixed investment and state and local spending. Also, imports, which are a subtraction in the calculation of GDP, increased.

This increase came in higher than expectations. Capital Economics predicted an increase of just 2.5%, 0.4 percentage points lower than the actual GDP.

But there’s a catch:

“Unfortunately, 0.9% points of that gain was due to a one-off surge in soybean exports, which we already know will be reversed in the fourth quarter,” Capital Economics Chief Economist Paul Ashworth said.

Back in April, Capital Economics said it would take a lot to salvage this year’s GDP, and predicted an annual gain of just 2%.

“The bigger than expected 2.9% annualized gain in third-quarter GDP growth confirms that the economic recovery has regained some of the momentum lost within the last year,” Ashworth said. “As such, this leaves the Fed firmly on track to raise interest rates in December and a hike at next week’s FOMC meeting isn’t entirely out of the question.”

Another expert agrees that the Federal Open Market Committee could be tempted to raise rates, but warns against it.

“The Federal Reserve could be tempted to hurry the interest rate hike because of the good GDP number,” said Lawrence Yun, National Association of Realtors chief economist.

“We should keep in mind however that the average GDP growth rate in the post-recession period over the past six years has been at a subpar performance of only 2% a year, rather than the long-term U.S. historical average of 3%.” Yun said. “Moreover, the latest GDP on a year-over-year basis is only 1.5%.”

I tend to disagree, read this to see why.

“Still, the latest GDP growth rate is implying accelerated job gains and thereby boosting income for households,” Yun said. “Home sales consequently should rise in the upcoming year.”

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