What New GDP Numbers Could Mean for Interest Rates

U.S. gross domestic product grew by 6.5% in the second quarter, up slightly from earlier in the year but falling short of estimates.

See: What Is the GDP — and What Do You Need to Know About It?
Find: How Hard Did COVID-19 Impact the US Economy?

According to the Bureau of Economic Analysis, the increase in second-quarter GDP reflected the ongoing economic recovery, reopening of establishments and continued government response to the pandemic. In other words, the bureau believes the ongoing effects of the pandemic to be the cause of any stifled growth.

The BEA adds that in the second quarter, government assistance payments through business loans and state grants increased while social benefits to households, such as stimulus payments, decreased.

Despite this, certain areas were strong, The The Wall Street Journal reported, suggesting the economic recovery is strong as well. The WSJ noted that consumer spending surged, while the negatives in the GDP report resulted from inventory drawdown, presumably due to supply shortages.

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See: Current Feelings on The Economy Are Impacting Concerns About Our Children’s Future, New Poll Shows
Find: States Whose Economies Are Failing vs. States Whose Economies Are Thriving

Supply chain disruptions have stunted economic progress throughout the world as a result of the pandemic. In the United States specifically, congestion at the nation’s largest ports has exacerbated the problem. Worldwide, computer chip shortages and raw material shipment delays have slowed down production and caused prices to surge in the face of limited supply and surging demand.

Strong consumer spending suggests that demand exists but might not currently have anywhere to go. Investors seemed to agree, as stocks rose Thursday even after news of the new GDP report.

See: Consumer Restraint Could Be Saving the U.S. Economy From Inflation
Find: The Great Resignation — Encouraging June Jobs Report Hides This Worrying Trend

What Could This Mean For Interest Rates?

The underlying data from the BEA suggests that the economic recovery is lagging but still well underway. It states that the increase in real GDP in the second quarter reflected increases not only in personal spending, but also in nonresidential fixed investment, exports and state and local government spending.

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This aligns with Fed Chair Jerome Powell’s comments just a day before. Powell said during a press conference following Wednesday’s Federal Open Market Committee meeting that the Fed has seen some of the progress it wants to see, but there is still “some ground to cover on the labor market side” before it raises interest rates, despite surging prices.

This means that interest rates will remain where they are at least for the near future. GDP numbers support this, suggesting that the historically low interest rates have helped keep the economy afloat during the pandemic.

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About the Author

Georgina Tzanetos is a former financial advisor who studied post-industrial capitalist structures at New York University. She has eight years of experience with concentrations in asset management, portfolio management, private client banking, and investment research. Georgina has written for Investopedia and WallStreetMojo. 
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