The picture emerging from this morning's data is broadly
positive, with both GDP growth and labor market improvement
moving in the right direction. If the Fed is looking only at
economic data, then these and the many others coming out next
week are good enough for the Taper process to get underway sooner
rather than later. But many have started hoping that the Fed may
rethink its timeline given the coming debt ceiling fight in
Congress and the changing geostrategic backdrop given
developments in the Middle East.
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The second read on Q2 GDP came in better than expected, with the
economy growing at +2.5% pace instead of the +1.7% that was
reported a month back. The positive revision resulted from
improved international trade contribution and modestly higher
business spending, partly offset by a greater decline in
government spending than originally estimated. The all-important
consumer spending numbers remained unchanged at +1.8% from the
first look at Q2 GDP growth.
Exports were up +8.6% in Q2 instead of +5.4% reported the first
time around, with all of the gains coming from goods exports.
Imports were up less than originally estimated (up +7% vs.
+9.5%), potentially pointing towards demand weakness,
particularly when read in combination with the lack of positive
revision to consumer spending.
Job gains and wage growth are the primary drivers that fuel
consumption growth, the mainstay of the U.S. economy. But while
job growth has been decent enough, as this morning's weekly
Jobless Claims data reconfirms, wage growth has been firmly held
down. The recent spike in oil prices due to developments in the
Middle East, if sustained over the coming months, could
potentially become another headwind for consumer spending and as
a result GDP growth. That said, it is reasonable to assume that
the U.S. economy has enough growth momentum to sustain GDP growth
of at least +2% in the coming quarters.
But many are hoping that the GDP growth pace ramps up to +3% and
higher later this year and next. This growth outlook underpins
the 'Taper' talk. As long as the economy is moving in that
direction, which it is at present, then we should expect the Fed
to move towards pulling back on the QE program. The announcement
will most likely come in the Fed's September meeting. But as
indicated earlier, the debt ceiling uncertainty and the prospect
of another conflict in the Middle East may prompt the Fed to
delay the announcement by a month or two. But irrespective of
whether the Taper is coming in September or later, nobody
questions that it is on its way.