US economy grew by 4% in Q2
July 30, 2014, 6:34 pm

The US economy rebound strongly at 4 per cent during the second quarter in 2014, the Federal government’s Bureau of Economic Analysis (BEA) said on Wednesday.

The data beat analyst predictions of a growth rate of 3 to 3.1 per cent. The BEA also revised the first quarter contraction from 2.9 to 2.1 per cent.

Economists had previously said that the first quarter slump was due to colder-than-normal winter temperatures which kept many job-seekers at home and led to a rise in unemployment and a drop in consumer spending.

Market conditions reversed by the beginning of the second quarter in April.

A mix of falling energy prices, a sturdy job market, rising prices in the housing sector, and a spike in consumer confidence not seen for seven years drove strong growth in consumer spending.

Consumer spending is considered one of the strongest indicators of GDP growth because it comprises more than 65 per cent of overall US economic activity.

Domestically, US companies hired more employees and invested more in the technology and industrial markets; household consumers paid more for goods and services, including purchasing more cars, furniture and home appliances.

The positive BEA data coupled with the overall market optimism and strong consumer confidence will likely add pressure on the Federal Reserve’s Open Market Committee (FOMC) to address a possible target date to increase interest rates.

Since the recession of 2008, the Federal Reserve has injected billions into the market through a bond-buying program which worked in tandem with near zero interest rates to spur business and consumer investment.

In May, the Federal Reserve cited evidence that the US economy pulled out of an economic slowdown nicknamed “the winter chill”, but acknowledged that recovery from recession created by the 2008 financial crisis is slow.

While it has tapered its $85 billion bond-buying scheme by $10 billion increments since late last year, it has kept interest rates near zero despite falling unemployment figures.

The data released on Wednesday, however, may push the FOMC to decide to raise interest rates by the fall, some analysts predict.

In the meantime, the Fed is likely to announce that it will continue tapering its monthly bond buy-back program (known as quantitative easing – QE) by another $10 billion bringing the fund total to just $25 billion.

The QE program is expected to be fully tapered by the end of this year.

Source: Agencies