US Q4 GDP growth second estimate pegged lower at 2.7%

24 Feb 2023 , 10:51 AM

In the US, the GDP typically goes through 3 estimates for each quarter. The first estimate for Q4 GDP had pegged the growth at 2.9% and in the second estimate this has been revised lower by 20 bps to 2.7%. There will be the final estimate coming out around the end of March. This is a slight contrast to the third quarter when the second and third estimate had seen an upgrade to the Q3 GDP first advance estimate. The reason for the lower GDP has been a fall in consumer spending, but we come back to that point later.

What has driven 2.7% growth in US GDP in Q4?

Before getting into the reasons for the lower GDP estimates, let us first get into the key drivers of this 2.7% GDP growth for the fourth quarter as per second estimate. The 2.7% growth in GDP in Q4 was triggered by increases in private inventory investment, consumer spending, non-residential fixed investment as well as federal, state and local government spending. However, this was largely offset by a decrease in residential fixed investment as well as lower exports. Let us get into the granular factors that triggered the shift in each of these pulls and pushes to the GDP number.

For instance, during Q4, the increase in private inventory investment was triggered by manufacturing demand from petroleum and coal sector. Other sectors like mining, utilities, and construction industries also contributed to inventory investment. On the highly sensitive of consumer spending, there was an increase in consumer spending on goods, which was more than offset by a fall in consumer spending on goods. This can be attributed to the higher inflation in services. Healthcare, housing and utility services were among the key drivers of consumer demand in the consumer segment. However, this was offset by a fall in consumer spending on goods like jewellery, new homes etc. 

Like in the first estimate analysis, higher Federal spending was driven by non-defence spending while the thrust came from state and local governments spending the increase in compensation of state and local government employees. Let us also talk about global trade which plays a key part in the decomposition of GDP growth. For the quarter, exports of non-durable goods other than petroleum fell. However, this was offset by higher export of travel and transport services. Imports saw a sharp fall in the imports of durable consumer goods but imports of travel services were sharply higher. Overall, positive news for GDP came from higher private inventory and higher government spending. Negative triggers came from weak consumer demand and a lower fall in imports.

 

What led to 20 bps lower GDP estimates for Q4?

In the previous para, we have broadly seen the decomposition of the various products and services that exerted the pull and push on GDP. The big question is how do we explain the 20 bps lowering of the second estimate of GDP compared to the first advance estimate. The below table comparing the GDP growth rate on a YOY and QOQ basis would clarify the issue much better. We look at quarterly growth (QOQ and YOY) and annual growth for 2022.

Estimates of quarterly US Q4 GDP growth (QOQ)
Particulars	Advance (First) Estimate	Second Estimate
Real GDP	2.9%	2.7%
Current Dollar GDP	6.5%	6.7%
PCE Price Index	3.2%	3.7%
PCE Price Index (ex-food, energy)	3.9%	4.3%
Estimates of quarterly US Q4 GDP growth (YOY)
Particulars	Advance (First) Estimate	Second Estimate
Real GDP	1.0%	0.9%
Current Dollar GDP	6.1%	6.2%
PCE Price Index	5.5%	5.7%
PCE Price Index (ex-food, energy)	4.7%	4.8%
Estimates of Annual US 2022 GDP growth (YOY)
Particulars	Advance (First) Estimate	Second Estimate
Real GDP	2.1%	2.1%
Current Dollar GDP	9.2%	9.2%
PCE Price Index	6.2%	6.3%
PCE Price Index (ex-food, energy)	5.0%	5.0%

Data Source: US BEA

The table above presents the GDP growth estimates as sequential quarterly growth, yoy quarterly growth and full year 2022 growth. Here are some key takeaways.

1. On a QOQ sequential basis, the real GDP growth has been cut for the fourth quarter by 20 bps from 2.9% to 2.7% as compared to the first advance estimate. This has been largely triggered by lower consumption spending in the US.

    

2. This has also been the trend if you look at quarterly GDP on a yoy basis. Even here, the fourth quarter GDP has been downsized by 10 bps from 1.0% to 0.9%. On the other hand, the annual growth rate for 2022 has been maintained constant at 2.1%.

    

3. However, during this period, the current dollar GDP or the nominal GDP has actually been upgraded. For instance, the QOQ nominal GDP growth has been upped from 6.5% to 6.7% in the second estimate, while quarterly yoy growth rate has been upped from 6.1% to 6.2%. Annual nominal growth rate remains the same.

    

4. The reason for the downgrade in the real GDP, despite the higher nominal GDP for the quarter in the second estimate indicates that inflation expectations have turned higher. That has been the reason for the contrasting moves of nominal and real GDP.

    

5. That is evident if we look at the PCE (personal consumption expenditure) driven inflation in the second estimate, which has been raised from 5.2% to 5.7%. PCE inflation is the inflation (not consumer inflation) that Fed uses for its rate outlook.

The second estimate is assuming a sharply higher inflation compared to the first estimate of fourth quarter GDP, which explains the lower real GDP estimate at 2.7%.

Will GDP data change the Fed rates outlook?

One question is whether the lower growth assumption will drive the Fed to go slow on rate hikes since this could be seen as a signal of slowing growth. Already, most economists and policymakers have warned of too much hawkishness having an impact on the GDP growth and even driving the US economy into recession. However, in reality, the Federal Open Markets Committee (FOMC) may treat the latest data flow as an affirmation of their belief that real growth is being pressured by inflation and nothing else. Here is what the Fed could do in coming months.

• If you look at the second estimate of US GDP for the fourth quarter on a QOQ basis and also on yoy basis, the real GDP is falling while the nominal GDP is higher. This gap is best explained by higher inflation, which is evident when we look at the sharply higher PCE inflation assumed in the GDP estimates.

   

• The second thing that is evident from the GDP numbers is that consumer spending on goods is visibly slowing down. That is exactly what the Fed wanted and so the Fed is going to take that as an indication that its tightening strategy is working. That will also ensure that there is no let up in the hawkishness of the Fed.

Are there are any takeaways for the Indian economy?

The good news is that despite the hawkishness of the Fed, the nominal GDP growth is still strong. Therefore, the Fed assumption is largely correct that by managing inflation, they will be able to boost real growth. Even the RBI has adopted a similar policy and this only means that the RBI may not give up on hawkishness too soon. For now, the RBI may target a higher terminal rate of above 7% and that is likely to have an impact on cost of funding. But, that would be a separate debate altogether.