The announcement July 30 that the U.S. economy grew at a four-percent annual rate for the second quarter of 2014 has financial analysts wondering if the Federal Reserve Bank will end earlier than expected the “quantitative easing” and interest rate suppression it has engaged in since 2008.
According to the U.S. Bureau of Economic Analysis (BEA), “Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 4.0 percent in the second quarter of 2014.... In the first quarter, real GDP decreased 2.1 percent (revised).” The numbers for the first quarter were better than previously announced, as the revised estimate replaced a 2.9 percent decrease in GDP.
The BEA noted that much of the growth can be attributed to a change in business inventory rather than actual market sales:
The change in real private inventories added 1.66 percentage points to the second-quarter change in real GDP after subtracting 1.16 percentage points from the first-quarter change. Private businesses increased inventories $93.4 billion in the second quarter, following increases of $35.2 billion in the first quarter and $81.8 billion in the fourth quarter of 2013.
However, another part of the reason for economic “growth” was the increase in spending by the government sector, including state and local governments, with a 3.1-percent increase during the second quarter after several years of budget cuts.
The BEA also announced multi-year revisions to its economic growth projections, claiming that new analysis showed lower-than-announced growth had occurred in 2011 and 2012, but higher-than-announced growth had occurred in 2013. Reuters reported,
The government raised 2013 third-quarter growth to a 4.5 percent annual pace from the previous 4.1 percent. Growth for the fourth quarter of last year was lifted to a 3.5 percent annual rate from a previously reported 2.6 percent. Growth for 2013 was raised to 2.2 percent from 1.9 percent.
The lackluster recovery — an average of just over two percent real GDP growth since 2010, as compared to more than four percent annually for seven years after the 1981-82 recession — is largely a result of a much lower national savings rate (about half of the 1982 level), and to a lesser extent higher government debt load (more than double the 1982 levels). But with the economy apparently heating up a little, the Wall Street Journal reported July 30,
Debate at the Fed is now turning to when to start raising interest rates. When last surveyed in June, most Fed officials said they expected to wait until 2015 and to move gradually once rate increases begin.
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Photo of Federal Reserve Headquarters in Washington, D.C.