Although the US economy has struggled with bad weather and strong dollar, it contracted slightly in the first quarter, meeting expectations. According to the Commerce Department, gross domestic product (GDP) fell by 0.2 percent in the January-March quarter, revised up from a 0.7 percent contraction it reported last month.
Consumer spending, which accounts for more than two-thirds of US economic activity, was stronger than previously estimated. The data was revised up to indicate a 2.1 percent growth from the 1.8 percent rate last month. With personal savings increasing to $720.2 billion, consumer spending is expected to accelerate in the second quarter.
Additionally, as the impacts of bad weather conditions and port disputes lessen, there are signs that growth is picking up in the second quarter. Some leading indicators such as retail sales and the labour market showed improvement. Retailers reported strong sales in May, while employers continued hiring and the housing sector was also boosted.
The GDP revision was in line with economists’ expectations and the US economy grew 2.2 percent in the fourth quarter of last year.
While the economy is showing signs of a sustainable recovery, the US Federal Reserve is on the brink of tightening its monetary policy. In its last Federal Open Market Committee meeting, Fed officials said that economic activity has been expanding moderately and the economy is strong enough to support an interest rate hike by the end of this year.
There are concerns that higher US policy rates could result in significant market volatility with consequences to financial stability spilling beyond the borders of the US, especially in emerging markets.