Must know: Takeaways from the Fed's July FOMC meeting (Part 5 of 7)
The U.S. Federal Reserve held its sixth Federal Open Market Committee (or FOMC) meeting of the year July 29–30. At its conclusion, on Wednesday, July 30, the Fed released the press statement for the meeting. In this section, you’ll read about the FOMC’s update on the prevailing economic conditions.
The FOMC sheds light on the prevailing economic conditions
The July FOMC press statement made a number of observations on the current conditions in the U.S. economy.
- Economic growth in 2Q14 had rebounded
- Business investment was increasing
- Household spending appeared to be increasing moderately
- There was slow recovery in the housing market recovery
- Fiscal drag was restraining economic growth, although this effect was slowing
How does the FOMC’s economic update compare with 2Q14 GDP data?
Let’s take a look and see how the 2Q14 gross domestic product (or GDP) figures released by the Bureau of Economic Analysis on Wednesday, July 30, compare.
Second quarter GDP grew 4% quarter-over-quarter (or QoQ) on a seasonally adjusted annual rate (or SAAR), compared to a contraction of 2.1% in the 1Q14. The higher-than-average rate received a bump in the second quarter partly due to a lower base in the first quarter. 1Q14 GDP had contracted due to the effects of the polar vortex which affected almost all sectors of the economy.
The higher-than-average growth would be beneficial for the economy, particularly large cap stocks like those included in the S&P 500 Index (SPY).
Real personal consumption expenditures increased by 2.5% in 2Q14, compared to a more modest bump of 1.2% in 1Q. An increase in personal consumption may benefit companies in the consumer staples sector like Proctor & Gamble (PG) and Walgreens, which are included in the SPDR Consumer Staples Select Sector ETF (XLP).
Real nonresidential fixed investment, a category included in business investments, grew 5.5% in 2Q14, compared to 1.6% in 1Q14. Investment in equipment increased 7% in the second quarter, which would likely benefit durable goods manufacturers, like Caterpillar (CAT) and Boeing, which are included in the State Street Industrial Select Sector SPDR (XLI).
Real residential fixed investment increased by 7.5% in 2Q14, according to the GDP release. This followed a decrease of 5.3% in the previous quarter. Despite the increase, the recovery in the housing market was slow, according to the FOMC statement.
The FOMC’s assessment is probably based on a number of other factors like new and pending home sales, which have been weak lately. Also, the increase in mortgage rates in 2014 hasn’t helped year-over-year (or YoY) comparisons.
On fiscal drag
The Fed believes that the decline in government spending is exerting a detrimental effect on economic growth, although the effect seems to be diminishing. Real federal government expenditure declined by 0.8% in 2Q14, compared to a decline of 0.1% in 1Q14. This effect was mitigated by an increase in real state and local government spending which increased by 3.1% compared to a decrease of 1.3% last quarter.
Dr. Charles Plosser dissents
These factors taken together may mean that the recovery is progressing better than many policymakers believe. However, the unwillingness of the FOMC to include economic progress towards the Fed’s goals in the guidance provided is the reason why head of the Philadelphia Fed Dr. Charles Plosser dissented on the statement issued at the end of the July meeting.
You can read more about Dr. Plosser’s views on monetary policy and his reasons for the dissent in the next section.
Browse this series on Market Realist:
- Part 1 - Must-know: The lines of dissent in the July FOMC statement
- Part 2 - Why the Fed’s taper impacted US asset classes
- Part 3 - Differences between the June and July FOMC statements
- Budget, Tax & Economy
- Federal Open Market Committee