Why is economic growth important?
Economic growth, or the rate of change of economic output, is the broadest barometer of economic health of a country. Changes in economic growth can give you an idea of where an economy is headed.
From the perspective of monetary policy, a strong rate of economic growth is required for a central bank to tighten policy. By tightening policy, we mean reversing the easy availability of cheap money. If economic growth is picking up, tightening monetary policy becomes imperative for a central bank. Otherwise, the easy availability of money would eventually result in the country’s citizens consuming more goods faster. This would lead to a run-up in inflation—or even hyperinflation—making goods and services a great deal more expensive.
How is US economic growth placed?
The latest release for economic growth came in on July 30, 2015, when the advance estimate for 2Q15 showed that the US economy grew at 2.3% from the same period a year ago. Although this was slightly lower than some market estimates, it brought cheer to market participants. After the release of the report, stocks like Western Digital (WDC), Wynn Resorts (WYNN), and Vertex Pharmaceuticals (VRTX) led the gains on Wall Street. Equity ETFs like the iShares Core S&P 500 ETF (IVV) and the iShares S&P 500 Growth ETF (IVW) also posted a small rise.
In another positive, the release showed that US economic growth in 1Q15 rose by 0.6%. Previously, it had been estimated that the economy had contracted by 0.2% during this period.
Is this rate good enough for the Fed?
The last meeting of the central bank policymakers took place on July 28–29, a day ahead of this data release. However, with the information they had until that time, policymakers stated, “Economic activity has been expanding moderately in recent months.” This is a much more positive statement than the one in March 2015, which stated that “economic growth has moderated somewhat.”
So, it seems that with respect to economic growth rates, the US economy seems to be well placed at this time. In the next article, we’ll look at a key driver of US economic growth: household spending.