WASHINGTON – The U.S. economy is showing signs of more life after a less-than-stellar start to the year.
The government said Friday that first-quarter growth, while disappointing, wasn’t as bad as first thought. And a number of more recent indicators are showing decent gains in key areas like consumer spending and housing.
All the signs point to an economy that has probably doubled its momentum this quarter. But faster growth also raises the prospect that the Federal Reserve will want to nudge interest rates higher.
Fed Chair Janet Yellen said exactly that at an appearance Friday at Harvard University. She noted that after weak growth in the fourth quarter of last year and the first three months of this year, it “looks to be picking up from the various data that we monitor.”
She said if the growth continues and the labour market keeps improving, then “probably in the coming months, such a move (rate hike) would be appropriate.”
Yellen, who stressed that the Fed’s plan is to raise rates “gradually and cautiously,” did not specify when exactly a rate hike might occur. But many economists believe it could come as soon as the Fed’s next meeting on June 14-15.
Expectations of a possible June hike have been climbing since the central bank surprised investors last week with the release of the minutes of the April meeting. The minutes showed that Fed officials were prepared to raise rates at the June meeting if the economy kept improving.
The Fed boosted rates by a quarter-point in December after leaving them at a record low near zero for seven years. At the time, it indicated that four more rate hikes could occur this year. But it has so far put further increases on hold in the wake of financial market turbulence in January and February triggered by unexpected weakness in the global economy.
Yellen’s remarks Friday came after the Commerce Department reported that the gross domestic product, the broadest measure of economic output, grew at an annual rate of 0.8 per cent in the first quarter.
That was slightly better than the initial estimate of 0.5 per cent but still marked the second straight quarter in which growth has slowed. The GDP increased at a modest 1.4 per cent rate in the fourth quarter.
Economists, however, are forecasting a rebound. Based on recent better-than-expected reports, they have been revising their second-quarter growth estimates higher, up from less than 2 per cent to around 2.5 per cent.
After the new GDP report, some economists said growth could hit 3 per cent in the current quarter.
The optimism stems from hopes that strong employment gains will boost household incomes and fuel consumer spending, which accounts for 70 per cent of economic activity.
For the first quarter, consumer spending grew at a rate of 1.9 per cent, the weakest showing in a year. But recent strength in retail sales, points to a second quarter rebound. And a separate report Friday showed that the University of Michigan’s consumer sentiment survey rose to 94.7 in May, the highest level in nearly a year.
The revision in the GDP report came from slightly less economic drag from the trade deficit and a less severe slowdown in inventory growth, as well as stronger gains in housing that initially reported a month ago.
Business investment remained weak with investment in structures falling at a rate of 8.9 per cent, slightly less than the 10.6 per cent plunge that was first reported. This category has suffered because of sharp cutbacks in drilling and exploration by energy companies.
While business investment remained weak, investment in residential construction was growing at a sizzling 17.1 per cent rate, the strongest advance in more than three years.
The U.S. economic expansion will celebrate its seventh birthday next month, making it the fourth longest recovery since World War II. But it has also been the slowest, averaging modest annual growth of 2.1 per cent.
Financial markets went into a nosedive at the beginning of the year, dragged down by worries about global growth and a sharp slowdown in China, the world’s second largest economy.
Since then, markets have recovered all their early-year losses. Many economists believe that the Fed’s decision on whether to raise rates in June will hinge largely on how the labour market performs in May. A report on May employment comes out on June 3.