Bumped-Up Growth Estimate May Spur September Rate Hike, Keycorp

The revised estimate of the economy's second-quarter growth "changes the picture" and may prompt Federal Reserve policymakers to raise interest rates, said Ken Mayland, chief economist at KeyCorp in Cleveland.

The change "probably gives the Federal Reserve a case of the chills," Mr. Mayland said. "The revised GDP report again raises the concerns that this economy is overheating."

The economy grew at a 3.6% annual rate in the second quarter, the Commerce Department said last week. The previous estimate was 2.2%. Stronger exports and the fastest buildup of business inventories since 1984 accounted for most of the upward revision.

The Fed's Open Market Committee, which decided to leave the overnight bank lending rate unchanged at 5.5% during its Aug. 19 meeting, meets next on Sept. 30.

"I would grant that third-quarter growth will come under the second quarter, because of the likely negative influences of foreign trade and inventories," said Mr. Mayland. He added that the growth rate probably ranged between 2.25% and 2.5% in the July-to-September period.

However, "consumers are heading back in force to stores," he said. "We are heading for what looks like to me a gangbuster fourth quarter, which is 4% growth." That "undoubtedly makes the Federal Reserve nervous," he said.

Jobs remain plentiful, government figures showed last week. First-time jobless claims dropped by a larger-than-expected 16,000 people to a seasonally adjusted 323,000 in the week ended Aug. 23. Analysts surveyed by Bloomberg News had expected a decline in claims of 7,000, to 330,000. The decline is "indicative of tight labor markets and is consistent with a persistent unemployment rate in the 4.8%-to-5% range," Mr. Mayland said.

The report is "also indicative of strong growth in the overall economy." The monthly employment report, a more complete picture of overall job growth, will be released Sept. 5 and is expected to show that the economy added 68,000 jobs in August while the unemployment rate held steady at 4.8%-a 24-year low.

Looking ahead, job growth will be "very strong" in the second half and "there's a good chance we are going to see an increasing amount of pressure on average hourly earnings," Mr. Mayland said. "And that would raise the specter of inflation."

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