US Q1GDP first advance estimates come sharply lower at 1.1%

For the first quarter of 2023 ending March 2023, the US BEA has just released the first advance estimates at 1.1%. That is much lower than the 2.6% GDP growth evinced in the fourth quarter ending December 2022. It also raises the spectre of a real slowdown in the US economy, which ratifies the signals coming from the inverted yield curve over the last few months.

What is the big picture of Q1 GDP in the US?

Let us first look at the big picture of the GDP story in the March 2023 quarter. The 1.1% increase in real GDP (nominal GDP adjusted for inflation) can be largely explained by an increase in consumer spending, higher exports, rise in federal government spending, state, and local government spending, and as well as non-residential investments in fixed assets. However, this was partially offset by growth reducing factors like lower private inventory investment and weak residential fixed investment as well as higher imports in the quarter. To explain this 1.1% growth in GDP in absolute terms, the US real GDP stood at $26.47 trillion in Q1-2023 compared to $24.74 trillion in Q2-2022.

Is inflation still a pressure on real GDP growth?

Even in the midst of the banking crisis in the US, the US Federal Reserve has been fairly adamant about holding on to its hawkish stance. It had already made it clear that it would treat the banking crisis as distinct from the battle against inflation. In a sense, if you look at the GDP data for the first quarter, it is quite clear that inflation continues to pose a major problem. For example, real GDP is the nominal GDP adjusted for inflation. The real pressure for the US economy is not coming from a slowing of the nominal GDP by persistently higher inflation. Let us look at some data points to ratify this view.

Let us first look at the current-dollar GDP or the nominal GDP. That increased 5.1% and added $328 billion to the nominal GDP pool. That means, absolute growth is still there. Of course, this is lower than the fourth quarter nominal GDP growth of 6.6% or $414 billion in absolute GDP accretion. But the real issue was on the inflation front. For instance, the price index for gross domestic purchases increased 3.8% in the first quarter, compared with an increase of just 3.6% in the fourth quarter of 2022. The personal consumption expenditure (PCE) price index increased 4.2% in the first quarter of 2023 as compared to just 3.7% in the fourth quarter. Even if you consider core PCE, it was up 4.9% versus 4.4%.

What explains the fall in real GDP growth?

What explains the deceleration of GDP growth in the first quarter for the US economy? Yes, inflation is one factor that is impacting the real GDP, but there is also a slowdown visible in select aspects of the economy. Here are some of the key takeaways from the first quarter US GDP data.

1. Consumer spending continues to be higher. This is reflected in increases in goods and services. Within goods, the major contributor  to consumer spending was motor vehicles and parts. On the other hand, under the services category, the increase was led by healthcare, food services and accommodations.

    

2. Let us now turn to the trade aspect with growth seen in exports (which is positive) and also in imports (which is negative). If you break up the exports, there was an increase in the export of goods. Consumer good exports (except food and automotive) saw an export boost in the quarter. However, that was offset by a decrease in exports of services; like transport.

    

3. Government spending was another factor that was responsible for the growth in GDP during the quarter. For example, the increase in Federal government spending was led by non-defence spending. On the other hand, the increase in spending by the state and local governments was primarily led by increase in compensation of state and local government employees.

    

4. Like in the previous few quarters, the reduction in business inventory investments continued reflecting the risks of slowing business confidence. In fact, the fall in private inventory investment were primarily led by wholesale trade (notably, machinery, equipment, and supplies) and manufacturing (led by other transportation equipment and petroleum and coal products).

    

5. Another area of pressure has been the residential fixed investment, which continues to be the leading contributor to the decrease was new single-family construction. Within imports, the increase reflected an increase in durable consumer goods and automotive vehicles.

To sum it up, the slowdown in real GDP growth in the first quarter of 2023 ended March is primarily a reflection of a downturn in private inventory investment as well as a distinct slowdown in non-residential fixed investment. There have been some positives too. For example, there was some positive impact coming from improved consumer spending and an upturn in exports. On a relative scale, the decrease in residential fixed investments were lower than the previous quarter.

Consumer incomes are sharply better on sequential basis

If we were to sum up the first quarter data, it looks like a vicious cycle. Higher personal incomes are leading to a rise in consumer spending and that is not allowing inflation to come down. Just sample these sequential figures.

• For the March 2023 quarter, the current-dollar personal income increased by $279 billion compared to an increase of $399 billion in the fourth quarter of 2022. However, the key factor to note is that disposable personal incomes increased by $571 billion in the first quarter compared to just $403 billion in the fourth quarter of 2022.

   

• The real disposable personal income increased 8% in the first quarter, as compared with an increase of just 5% in the fourth quarter of 2022. As a result, the personal savings stood at $946 billion in the first quarter as compared with just $759 billion in the fourth quarter of 2022. That means, the rate of personal saving as a share of disposable personal income has sequentially gone up from 4% to 4.8%.

What are the key takeaways here? The bottom line is that people still have a lot of money and a lot of access to liquidity and that is possibly keeping the inflation under pressure. However, people are cautious and prefer to spend this money for consumption than for creating any real estate investments.

How does Fed move from here and what it means for India?

There are some interesting signals for the Fed from the Q1GDP data. Firstly, the real GDP growth is sharply down, but that is less due to pressure on growth and more due to pressure on inflation. The inflation will continue to remain elevated as long as personal savings and liquidity with the US people remains high. While headline inflation may be coming down progressively in the last few months, Fed is unlikely to see too much success till consume spending comes down meaningfully. Clearly, the Fed is likely to continue to hike rates by another 50 to 75 bps from here and combine it with tapering of bonds.

For India, the path is already selected. India is likely to now focus more on growth and allow inflation to control itself. The US GDP slowdown will make the Indian government and the RBI cautious about falling exports and lower tech spending. This data could signal the proper divergence of monetary policy between the US Fed and the RBI. Growth will be the focus for the Indian economy.