Final Estimate for US Q2-2023 GDP maintained at 2.1%

29 Sep 2023 , 11:39 AM

The first advance estimate had pegged Q2-2023 US GDP growth at 2.4% in real terms. However, the second estimate had lowered the growth estimate by 30 bps from 2.4% to 2.1%. That was partially because the second estimate included more data points, which were not available at the time of the first advance estimate and hence it was more comprehensive. The final estimate for Q2-2023 GDP released on 28th September 2023, has maintained the projected rate of growth for the June 2023 quarter at 2.1%.

The US BEA puts out 3 estimates for the GDP over 3 successive months. The First Advance estimate for Q2-2023 was put out in end July showing real GDP growth in Q2-2023 at 2.4%. However, the second estimate pegged the GDP growth lower by 30 bps at 2.1%. Now the third and final estimate of Q2 GDP has been pegged at 2.1%. This is in contrast to the trend we saw in the first quarter ended March 2023. During that quarter, each subsequent estimate was an improvement over the previous estimate. Now, the next month of October 2023 will see the first advance estimate for Q3-2023 reported and the cycle goes on.

The GDP advance estimate are not just a barometer of the robustness of the US economy, but also has important ramifications for the US Federal Reserve. The Fed has been trying to implement a soft landing. This envisages a situation wherein the rates are hiked; inflation is brought under control and at the same time; GDP growth is not impacted. In the latest long term estimates of macros issued by the FOMC, the GDP growth for 2023 had been upped from 1% to 2.1%. with the data on the first two quarters already out, it looks very likely that the US economy would be able to meet the 2.1% full year target or even, better it.

How the 3 estimates for Q2-2023 GDP look like?

With the final estimate for GDP out for Q2-2023, we can make a reasonable comparison on how the Q2-2023 GDP evolved over the 3 estimates. If you break up the third and final estimate of GDP; there have been downward revisions to consumer spending and federal government spending. However, this was offset by upward revisions to non-residential fixed investments, exports, private inventory investment, and residential fixed investment. What will actually emerge from the table below is that the stable GDP between the second and third estimate is despite a sharp fall in the nominal GDP.

 

Comparing the 3 estimates for Q2-2023 (US GDP) – QOQ (%)
Variable	Advance Estimate	Second Estimate	Third Estimate
Real GDP	2.4	2.1	2.1
Current-dollar GDP	4.7	4.1	3.8
Real GDI	…	0.5	0.7
Average of Real GDP and Real GDI	…	1.3	1.4
Gross domestic purchases price index	1.9	1.7	1.4
PCE price index	2.6	2.5	2.5
PCE price index ex food and energy	3.8	3.7	3.7

Data Source: US Bureau of Economic Analysis

One of the major takeaways from these numbers is that between the first estimate and the third estimate the nominal GDP has fallen sharply. That means, the growth engine has slowed and that can be largely attributed to expectations of a slowdown in the US economy due to too much hawkishness. This sharp fall in nominal GDP expectations is also supported by a fall in consumption spending, which has been selectively hit in the latest projections of second quarter GDP in the US. However, there have been two redeeming features that have helped the US GDP to stay robust even in the third and final estimate put out.

While there has bene a perceptible fall in nominal GDP and consumption spending, there has been a rise in the gross domestic investments, which has offset the fall in consumption demand. This has also been helped along the way by flat to lower inflation which is a direct outcome of the sustained hawkish policies of the Fed. Real growth in GDP is the nominal growth adjusted for the rate of inflation. Therefore, even though consumption spending has been hit, it is compensated by higher investments. Similarly, while nominal GDP has taken a hit, it is compensated by lower inflation allowing the real GDP growth to stay stable.

There is a positive upgrade to First quarter GDP

If the Fed has been looking at hints of a possible soft landing, there is more good news. The revised estimates for the first quarter have raised the GDP estimates from 2.0% to 2.2%, as depicted in the table below.

Q1-2023 GDP Estimates (Original and Revised)
Variable	Original Estimate	Revised Estimate
Real GDP	2.0	2.2
Current-dollar GDP	6.1	6.3
Real GDI	-1.8	0.5
Average of Real GDP and Real GDI	0.1	1.4
Gross domestic purchases price index	3.8	3.6
PCE price index	4.1	4.2
PCE price index excluding food and energy	4.9	5.0

Data Source: US Bureau of Economic Analysis

The story of how the three estimates for second quarter GDP is also reflected when we look at the revised estimates of GDP growth for the first quarter ended March 2023 (Q1-2023). In this case, the real GDP growth has been upgraded by 20 bps in the revised estimate from 2.0% to 2.2%. However, the reasoning is slightly different. The first quarter revisions have seen better than expected nominal GDP and a sharp turnaround in the real gross domestic investments. Here again, the consumption is under pressure, but that is more than made up by the spike in investments. More importantly, even as inflation has been higher than the original estimates in Q1-2023 (headline inflation and core inflation), the higher nominal GDP growth rate has made up for that. That is the good news.

Current dollar GDP, personal incomes, and disposable incomes

Here are some of the key takeaways that we decipher from the data on GDP and income levels based on the second estimate for Q2-2023.

• In the Q2-2023, the current dollar GDP (nominal) increased by 3.8% annualized resulting in nominal GDP accretion of $249.4 billion in the quarter taking the nominal GDP in the second quarter to $27.06 trillion. 

   

• In the Q2-2023, the PCE inflation (used by Fed for rate decisions), stood at 2.5% (exactly where it stood in the second estimate). In Q2-2023, even the core PCE inflation (excluding food and fuel), increased by 3.7%, flat estimates compared to second estimate.

   

• Current dollar personal income in Q2-2023 increased by $239.6 billion compared to an increase of $278 billion in the Q1-2023 quarter. Compared to the second estimate, this is a slight upward revision. Clearly, personal incomes have bene under pressure, but not as much as was originally imagined.

   

• Disposable personal income in Q2-2023 increased by $296.5 billion, sharply higher than the second estimate. Real disposable personal incomes in the second quarter grew by 6.1, a substantial upward revision. This appears to be largely due to the impact of lower inflation.

   

• Personal savings stood in Q2-2023 at $1,040 billion, a very sharp upward revision of compared to the second estimate for Q2-2023. The personal savings rate as a share of personal disposable income improved from 4.5% in the second estimate to an impressive 5.2% in the third estimate. The Fed tightening and the banks tightening credit has made people more cautious about spending.

What do we glean from this story. Fed has continued to hike the rates at a fairly steady rate, despite inflation coming down sharply. This, combined with the lag effects, has led to pressure on disposable incomes. However, there has been a perceptible fall in the spending, as is evident from the propensity of people in the US to save more, so they are still likely to be left with much higher disposable income.

Gross Domestic Income and corporate profits for Q2-2023

Real gross domestic income (GDI) is up 0.5% in Q2-2023, compared to -1.8% contraction in the first quarter to March 2023. The average of real GDP and real GDI (which the US government uses as a supplemental measure) has increased by 1.4% in Q2-2023 compared to just 0.1% in the first quarter. This hints at a fundamental improvement in the US economy in the second quarter as compared to the first quarter. However, we have to await the final revisions for the second quarter and the third quarter data points before we can arrive at some conclusions of how the full year would pan out.

The good news is that corporate profits are beginning to look up once again in Q2-2023. Profits from current production (including inventory adjustments and capital consumption adjustments) fell by $83.3 billion, compared to a fall of $121.50 billion in Q1. That is a sharp upward revision of $38.2 billion. However, if you break-up the data, it is the financials that had done well in the June quarter after a rough March quarter. For example, profits of US financial companies increased by $17.30 billion in Q2-2023. At the same time, the profits of the non-financial companies fell by $92.7 billion in Q2-2023 an upward revision of $10.2 billion compared to Q1-2023. There has also been an upward revision in rest of the world profits earned by US corporations.

How will the Fed read the data, and what it means for India?

For the Fed, this would largely be good news. It means that the US has been able to raise rates and keep inflation in check without disrupting GDP growth in any serious way. Clearly, the soft landing is no longer a mirage, but almost a reality now. Fed has been quite relentless about rate hikes and after the brief pause in June, it is back to hiking rates in late July. September, once again, was a pause but November could see another 25 bps rate hike. Even Jerome Powell, speaking at the Jackson Hole symposium was quite emphatic that more rate hikes were needed to bring down inflation decisively towards the 2% target. In recent speeches, governor Michelle Bowman has also taken a similar line, even while being a lot more hawkish in her intent.

What does this data mean for RBI policy? The RBI has decided in favor of growth over inflation in the last 8 months and that looks like unlikely to change for now. RBI is certainly keeping one eye on the extent of global hawkishness. Inflation is now above the 6% outer tolerance limit for 2 months in a row and that is a problem. The stable GDP in the US means that the Fed would certainly go for another rate hike in November, while anything beyond that remains fairly hazy. For the RBI, that would mean greater risk of monetary divergence. Whether the RBI decides to go for a rate hike immediately or wait for longer, remains to be seen. One thing is certain; that the luxury of waiting and watching from the sidelines may not be available to the RBI for much longer. The RBI would have to bite the bullet on rates; sooner rather than later.