Final Advance Estimate of US Q3-2024 GDP slightly lower at 2.8%

4 Nov 2024 , 02:12 PM

US Q3-2024 GDP GROWTH FINAL ESTIMATE LOWER AT 2.8%

The first advance estimate of US GDP for the third quarter (Q3-2024) has been announced by the US Bureau of Economic Analysis (BEA) at 2.8%. That is 20 bps lower than the final estimate of real GDP growth in Q2. However, this is the only the first advance estimate of Q3 GDP growth and there will be two more estimates with more data flowing in. Based on the cues coming from the Atlanta Fed GDP estimates, the actual GDP in Q3 could be closer to 3.0% mark. The final estimate of Q2 GDP at 3.0% is almost an affirmation that the US economy is nowhere close to a hard landing. Let us first look at some of the key revisions of previous data on GDP growth, which makes the growth more like a secular trend rather than as a series of jagged edges.

Let us start with the Q3-2023 GDP growth. Originally, this quarter had reported one of the best growth rates in GDP at 4.9%. However, in the revised estimates, the GDP growth for Q3-2023 has been downsized by 50 bps to 4.4%. what about the Q4-2023 GDP growth. Originally, this quarter had been reported at 3.4%. However, in the revised estimates, the GDP growth for Q4-2023 has been downsized by 20 bps to 3.2%. Finally, we turn to the Q1-2024 GDP growth. Originally, this quarter had reported very low growth rates in GDP at 1.4%. However, in the revised estimates, the GDP growth for Q1 has been upgraded by 20 bps to 1.6%. While the fall is still sharp in the first quarter, the overall GDP does look like a linear trend now.

KEY COMPONENTS OF THE Q3-2024 GDP ESTIMATES

The table below captures the key components and the key drivers of GDP growth in the third quarter. All the figures below present yoy growth figures.

third quarter. All the figures below present yoy growth figures.

GDP Data	Q2-2023 YOY (%)	Q3-2023 YOY (%)	Q4-2023 YOY (%)	Q1-2024 YOY (%)	Q2-2024 YOY (%)	Q3-2024 YOY (%) #
GDP Overall	2.4	4.4	3.2	1.6	3.0	2.8
PCE Overall	1.0	2.5	3.5	1.9	2.8	3.7
Gross PDI	8.0	10.1	0.7	3.6	8.3	0.3
Export Growth	-4.8	4.9	6.2	1.9	1.0	8.9
Import Growth	-3.1	4.7	4.2	6.1	7.6	11.2
Federal Outlay	2.9	5.7	3.6	1.8	3.1	5.0
Nominal GDP	4.3	7.7	4.8	4.7	5.6	4.7
Gross DPI	6.4	4.1	4.9	9.2	5.0	3.1

Data Source: US Bureau of Economic Analysis (BEA) # – First Advance Estimate

What are the key takeaways from the above components of the Q3 GDP estimates along with legacy data for the last 6 quarters. What has helped to boost the GDP in the third quarter. Clearly, the quantum of international trade has seen an affirmative leap. This applies to export growth and substantially to import growth too. The government spending on consumption and investments have been very strong in the latest quarter and it has been a key driver of the GDP growth in the third quarter. Also, the private consumption expenditure (PCE) has also been higher in the quarter giving it a positive push.

What about the factors that pulled down the GDP growth. The private domestic investment (PDI) has seen a sharp fall in the latest month, as has the gross private domestic investments. As a result, the nominal GDP for the quarter has fallen sharply 5.6% to 4.7% resulting in lower real growth in GDP by 20 bps despite the inflation also being lower.

DISSECTING THE Q3-2024 US GDP GROWTH – FIRST ADVANCE ESTIMATE

We know that the GDP growth in Q3 has tapered from 3.0% in Q2 to 2.8%. Of course, this is only the first advance estimate and there will be two more estimates coming in towards the end of November and December to give the final picture. However, it would be instructive to look at how the data changed in the latest GDP estimate. Here is a quick dekko.

GDP Data	Q2-2023 YOY (%)	Q3-2023 YOY (%)	Q4-2023 YOY (%)	Q1-2024 YOY (%)	Q2-2024 YOY (%)	Q3-2024 YOY (%) #
GDP Overall	2.4	4.4	3.2	1.6	3.0	2.8
GDP – Goods	1.6	7.1	2.5	-3.6	5.2	4.8
GDP-Services	1.7	2.5	2.8	3.2	2.4	2.8
Structures	11.2	7.5	8.6	9.9	-0.6	-3.6
Auto O/P	13.3	-8.2	-19.0	3.4	20.2	-17.6
GDP Ex-Auto	2.2	4.7	3.9	1.6	2.6	3.4
Non-farm GVA	2.4	5.0	3.4	1.3	3.0	3.5
Goods Share	0.5	2.2	0.8	-1.1	1.6	1.5
Services Share	1.0	1.5	1.7	1.9	1.5	1.7

Data Source: US Bureau of Economic Analysis (BEA) – # First Advance Estimates

What exactly has led to strong GDP growth in Q3-2024 at 2.8% (first advance estimate)?

• The growth in GDP for physical goods had bounced back sharply to 5.2% in Q2. It has tapered to 4.8% in Q3, but still very robust in absolute terms. The increase in GDP reflected increase in services and goods, especially the non-farm sector growth.
  
• GDP Services continued to be in the positive as it witnessed limited global impact. GDP Services for Q3-2024 stood at 2.8% which is sharply higher than 2.4% in Q2, but lower than 3.2% in Q4 of 2023. Clearly, the momentum in services appears to have picked up once again in Q3. It had partially slowed down in Q2 due to the trade and services constructions imposed by the Red Sea crisis.
  
• The auto output turned deep into the negative from a high of 20.2% in Q2 to -17.6% in Q3-2024. This is sharply lower than the previous two quarters of data flows. Auto output had been in the negative zone for 3 previous quarters in a row. Since the turnaround was rapid, we saw a sharp adjustment in the second estimate and the third estimates. However, auto output has again dipped into negative zone in the latest quarter.
  
• The non-farm GVA (gross value added) rose by 3.5% in Q3-2024 as per the first advance estimate. That is 50 bps higher than the figure in the second quarter data at 3.0%. However, the non-farm GVA is still lower compared to the third quarter of the previous year 2023, when it was above the 5% mark.
  
• Finally, let us look at the last two rows, which capture the contribution of goods and services to the change in GDP. In Q1-2024, goods had made a negative contribution while services was in the positive, which led to the tepid growth in first quarter GDP. However, the second quarter had seen GDP in goods turn around to positive while the services output remains steady in the positive zone. In the first estimate of Q3, the goods contribution is slightly down while the services contribution is slightly higher.

Let us now turn to how the personal incomes shaped in Q3-2024.

HOW PERSONAL INCOMES SHAPED IN Q3 (FIRST ADVANCE ESTIMATE)

How did the personal incomes compare in the first advance estimate of Q3 compared to the final estimate of Q2? Let us start with the macro picture of current dollar GDP (nominal GDP), which increased by 4.7% or by $333.2 Billion to $29.35 Trillion, as per the first advance estimate of Q3 GDP. In the second quarter of 2024, the GDP had increased by 5.6% or $392.6 Billion.

Let us now turn to the current-dollar personal income (nominal terms), which saw an absolutely accretion of $221.3 Billion in the first estimate compared to the increase of $315.7 Billion in the second quarter. final estimate of Q2. The increase in current dollar personal income reflected increases in compensation.

Let us now move to the disposable personal income (DPI). For Q3-2024 (first advance estimate), the DPI increased by $166.0 Billion (+3.1%) as compared to $260.4 Billion (+5.0%) in the third and final estimate of Q2. Real Disposable Personal Income increased by 1.6% in Q3-2024 as compared to 2.4% in the second quarter of 2024.

The personal savings in the first estimate of Q3-2024 was ₹1.04 Trillion as compared to the final estimate for Q2-2024 at $1.13 Trillion. The personal savings rate (as measured by personal savings as a share of DPI), was at 4.8% in the third quarter as compared to 5.2% in the second quarter final estimates.

To sum up the story of GDP in the first advance estimates of Q3-2024, the growth reflected an increase in consumer spending, exports, and Federal government spending. Higher imports in the quarter were a drag on the GDP growth in the quarter. What explained the 20 bps lower GDP growth at 2.8% in Q3 as compared to 3.0% in Q2. This can be attributed to a downturn in private inventory investment and a larger decrease in residential fixed investments in the quarter. Needless to say, higher exports, higher consumer spending and higher government outlays partially sobered these effects.

HOW CME FEDWATCH REACTED TO Q3-GDP FIRST ADVANCE ESTIMATES

Of the various factors influencing the CME Fedwatch probabilities, the GDP growth estimate is a key factor. When the growth is good, it is a signal that there are no risks of hard landing and the Fed does not have to worry too much about real growth or jobs. The CME Fedwatch captures the probability of rate cuts over the next one year based on the prices at which the Fed Futures are traded. Here are the CME Fedwatch probabilities.

Fed Meet	225-250	250-275	275-300	300-325	325-350	350-375	375-400	400-425	425-450	450-475	475-500
Nov-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	94.5%	5.5%
Dec-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	72.1%	26.6%	1.3%
Jan-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	41.6%	45.8%	12.0%	0.5%
Mar-25	Nil	Nil	Nil	Nil	Nil	Nil	27.5%	44.4%	23.5%	4.4%	0.2%
May-25	Nil	Nil	Nil	Nil	Nil	13.9%	36.0%	33.8%	13.9%	2.3%	0.1%
Jun-25	Nil	Nil	Nil	Nil	6.8%	24.7%	35.0%	24.1%	8.2%	1.2%	Nil
Jul-25	Nil	Nil	Nil	1.6%	11.0%	27.1%	32.4%	20.3%	6.6%	0.9%	Nil
Sep-25	Nil	Nil	0.5%	4.2%	15.5%	28.6%	29.0%	16.5%	5.0%	0.7%	Nil
Oct-25	Nil	0.1%	1.0%	5.9%	17.5%	28.6%	27.1%	14.8%	4.3%	0.6%	Nil
Dec-25	Nil	0.1%	1.4%	6.8%	18.3%	28.5%	26.2%	14.0%	4.1%	0.5%	Nil

(Data source: CME Fedwatch)

Here is a quick review of how the rate cut probabilities panned out after the GDP data and the PCE inflation data were announced towards the end of October. Our quick reading is that are doubts about the extent of dovishness that the Fed would go for and the CME Fedwatch is now betting that the Fed would go slow on rate cuts while maintaining its dovish approach. Here is our reading of the CME Fedwatch chart.

• After the 50 bps rate cut in September, the action shifts to November 07, 2024 when the penultimate Fed meeting of the US Federal Reserve is slated to be conducted. The CME Fedwatch has assigned a probability of 94.5% to 25 bps rate cut in November 2024. The CME Fedwatch does not seen any scope for a bigger than 25 bps rate cut in November.
  
• What about the first milestone of December 18, 2024? There is 72.1% probability of additional 50 bps rate cut (100 bps in all); but an equally powerful probability of 26.6% for an overall 75 bps rate cut only. The thinking is that while 100 bps rate cut by December is a conceivable scenario, 75 bps should also widely acceptable to markets.
• Let us turn to June 2025 milestone; wherein there is a 90.6% probability for a 125 bps rate cut; a 66.5% probability for 150 bps rate cuts from the peak. The probability of a 175 bps rate cuts has reduced to just 31.5%. That is looking increasingly unlikely. A lot will depend on key data points like the consumer inflation, PCE inflation, GDP growth, liquidity conditions and the unemployment data pan out in this period.
• Let us come to the final milestone of December 2025. At this point, the CME Fedwatch estimates 81.4% probability for 150 bps of rate cuts from the peak and a robust chance of 55.2% for 175 bps of rate cuts by December 2025. The likely scenario, as of the end of December 2025, could be that the US Fed rate could settle at (3.50%-3.75%). The probability of 200 bps rate cut by December 2025 has reduced sharply.

Is the Fed likely to tone down its aggressive rate cut timetable. If you go by the speeches of the FOMC members and the probability implied in the CME Fedwatch, that is already happening. Recent speeches by Michelle Bowman and Neil Kashkari have underlined the need for a more calibrated and gradual reduction in rates. That seems the way forward!

REST IN PEACE – HARD LANDING

We can now, say, with a sense of confidence that the hard landing discussion may not be on the centre table any longer. If one were to recollect the language of the dissent note of Michelle Bowman in September 2024; she had underlined 2 problems. Firstly, the 50 bps rate cut gave a message that Fed had won its battle against inflation, which is still work in progress and evolving. Secondly, according to Bowman, a 50 bps rate cut is tantamount to admitting that there is an economic slowdown in the US. That is largely erroneous!

When the Fed implemented a 50 bps rate cut in September 2024, it had attributed the decision to low inflation and risks to growth and jobs. The risk to growth and jobs have sobered. While there may still be adjustments in the labour data, due to migration and other factors, hard landing or growth concerns are not there any longer. If Q2 GDP growth in the US flattered at 3.0%, the first advance estimate of Q3 is also robust at 2.8%. Expecting a hard landing now looks like pressing the panic button too soon!