Federal Reserve June hike hopes reach fever pitch as US GDP slowdown less severe than previously thought

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US growth surprised economists (Source: Getty)

The American economy performed far better than economists previously thought at the start of 2017, as revised data supported the Federal Reserve’s case for another interest rate hike in June.

US GDP grew at an annual rate of 1.2 per cent in the first quarter of 2017, according to the US Bureau of Economic Analysis, after a first reading with less complete data showed an expansion of only 0.7 per cent.

Read more: US growth falls to its slowest in three years

Economists had expected an upward revision to the data, but the second estimate was still considerably higher than the 0.9 per cent consensus.

The big revision was driven by larger investment levels and stronger spending from consumers than had been estimated at first.

The revised figures still showed the US economy failed to maintain momentum from the last quarter of 2016, when GDP grew at an annual rate of 2.1 per cent, as consumer spending and company investment in stocks of products weakened considerably.

Read more: Is the US economy ready for higher interest rates?

However, the Federal Reserve's open market committee (FOMC) is still expected to raise interest rates at its next meeting on 14 June. Markets are currently pricing in a 87.7 per cent probability of a hike, according to calculations by CME Group.

Ian Kernohan, an economist at Royal London Asset Management, said: “As first quarter GDP estimates in the US are often weak, the Fed have already dismissed this data, instead placing more emphasis on the labour market figures, which have strengthened in recent months.

Off the back of this strength, another hike in US interest rates next month now seems a certainty.

Yet the improved economic news on the GDP front was tempered by a decline in orders of durable goods, a key measure of how busy factories will be in future months.

New orders for manufactured goods fell by 0.7 per cent in April, according to the US Census Bureau, after four consecutive monthly increases.

Read more: Fed signals it is close to rate hike

Nevertheless, the outlook for the US economy should roughly match the sunnier view expressed by Federal Reserve officials in their latest monetary policy meeting that weaker growth was a one-off, according to Ian Shepherdson, chief economist at Pantheon Macroeconomics.

He said: "We remain of the view that the first-quarter data were depressed by an array of factors – residual seasonality, delayed tax refunds, unusual weather, and the late Easter – and that growth in the second quarter and beyond will look much better."

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