Final Estimate of US Q1-2024 GDP up by 10 bps at 1.4%

30 Jun 2024 , 10:28 AM

US Q1-2024 GDP GROWTH FINAL TALLY AT 1.4%

As of the end of June, the third and final estimate of the US GDP for the first quarter ended March 2024 is out. Typically, in the US, the Bureau of Economic Analysis (BEA), puts out 3 estimates of GDP growth for each quarter. The first advance estimate after 1 month, the second estimate after 2 months and the Final Estimate after 3 months. The first estimate of US Q1-2024 GDP came in at 1.6%; sharply lower than 3.4% in Q4-2023 and 4.9% in Q3-2023. However, worse to come as the second estimate of Q1-2024 GDP got further downgraded by 30 bps to 1.3%. Now, the final estimate for Q1-2024 GDP is out at 1.4%. That is slightly better than the second estimate, but still too low in absolute terms.

Unlike the first estimate, the second and third estimates, progressively consider more data points and so they are also a lot more reliable. GDP data can be a double edged sword. From a growth perspective, this disappointing. Also, for Indian exports to the US and services sector, robust US growth is always welcome. However, from the Fed perspective, lower GDP aligns with the Fed target of keeping inflation lower and should be a trigger for rate cuts. We have to wait and watch how the rate cuts pan out. The Fed is expected to reverse the cycle and cut rates in September; and for that this GDP number should be supportive.

COMPARING THE 3 ESTIMATES OF Q1-2024 GDP DATA

The table below captures the gist of the 3 estimates of GDP growth for Q1-2024 and the components therein.

Macroeconomic Variables	Advance Estimate	Second Estimate	Final Estimate
Real GDP	1.6	1.3	1.4
Current-dollar GDP	4.8	4.3	4.5
Real GDI	0.0	1.5	1.3
Average of Real GDP and Real GDI	0.0	1.4	1.4
Gross domestic purchases price index	3.1	3.0	3.1
PCE price index	3.4	3.3	3.4
PCE price index excluding food / Energy	3.7	3.6	3.7

Data Source: US Bureau of Economics (BEA)

Here is what we read from the comparison of the three estimates of Q1-2024 GDP for the US economy and what contributed to this shift.

• The final update of Q1-2024 GDP growth marginally raised the real GDP estimate from 1.3% in the second estimate to 1.4% in the final estimate. The final estimate of real GDP is 10 bps higher, despite the PCE price impact being higher. However, this has been more than compensated by the rise in nominal dollar GDP in the final estimate.
• In terms of the granular reasons for this 10 bps upgrade to real GDP growth for Q1-2024, the upward revision reflects a downward revision to imports (which is a subtraction in the calculation of GDP), and upward revisions to non-residential fixed investments. Government spending was also higher, but partially offset by a downward revision to consumer spending in the third estimate.
• The lower of import estimates in the final estimate could be the outcome of the delays in shipping that are still a reality for global trade. With the Red Sea trade route almost shut, most of the cargo moves through the Horn of Africa, which is delaying movement and making imports for specific time frames artificially lower.

Consumer spending, which has been the backbone of the US economic growth for ages, has been under pressure in the June quarter. Also, any retail investing is more in the form of non-residential fixed investment.

DISSECTING THE Q1 2024 US GDP GROWTH  – FINAL ESTIMATES

With the third and final estimate of Q1-2024 GDP out, there is a proper base to compare how the GDP growth has moved in the last 6 quarters on yoy basis and what has triggered this move. The final estimate of Q1-2024 GDP growth came in at 1.4%, which is nearly 100 bps lower than the street estimates. The sequential GDP growth in the last 4 quarters were 2.2%, 2.1%, 4.9% and 3.4%. In comparison, 1.3% in Q1 2024 is sharply lower. We still need to await the third estimates of the Q1 GDP in end June 2024 to get a clearer picture. Here is a quick dekko of data.

GDP Data	Q4-2022 YOY (%)	Q1-2023 YOY (%)	Q2-2023 YOY (%)	Q3-2023 YOY (%)	Q4-2023 YOY (%)	Q1-2024 YOY (%) #
GDP Overall	2.6	2.2	2.1	4.9	3.4	1.4
GDP – Goods	6.2	-1.3	0.9	7.3	2.6	-3.8
GDP-Services	2.5	3.2	1.9	2.9	2.8	3.0
Structures	-9.6	8.9	7.7	10.0	10.4	9.7
Auto O/P	-1.2	14.7	15.4	-7.1	-21.8	-2.7
GDP Ex-Auto	2.7	1.9	1.7	5.2	4.2	1.5
Non-farm GVA	2.8	1.8	2.0	5.8	3.8	1.0
Goods Share	2.0	-0.4	0.3	2.3	0.8	-1.2
Services Share	1.5	1.9	1.1	1.7	1.7	1.8

Data Source: US Bureau of Economic Analysis (BEA) – # Third & Final Estimate

What exactly has led to lower GDP growth in Q1-2024, plus a downgrade in the second estimates of GDP growth. Here is a quick look at the major driving factors.

• The growth in GDP for physical goods dipped further into the negative in Q1-2024 going from -2.4% in the first estimates to -3.5% in the second estimates and -3.8% in the final estimates. In the last two sequential quarters, this figure had been +7.3% and +2.6%. It is an outcome of demand compression due to geopolitical risks and monetary tightness.
• GDP Services continued to be in the positive as it witnessed limited global impact. In fact, it was one of the factors holding up the GDP figure. GDP Services for Q1-2024. After, growth in GDP Services was lowered in the second estimate from 3.0% to 2.8%; it has now been pegged back at 3.0%. It is better than the two sequential quarters.
• The auto output continues to be negative, putting pressure on overall manufacturing output. However, the extent of the fall has reduced in Q1. In the first estimate of Q1 GDP, the auto output contraction was -6.4%; which was lowered to -7.1% in the second estimate, but raised sharply to -2.7% in the final estimate. That is one of the best auto sector performance seen in the last 3 quarters.
• The non-farm GVA (gross value added) fell to 1.3% in Q1-2024 in the first estimate, but has been further lowered to 0.9% in the second estimate. The final estimate has seen a small pullback to 1.0%, but still unfavourable compared to 3.8% and 5.8% in the last two sequential quarters.
• Finally, let us look at the last two rows, which capture the contribution of goods and services to the change in GDP. After a gap of 4 quarters, GDP Goods is having a negative impact on overall GDP growth, while services continue to maintain a positive contribution.

Let us now turn to how the personal incomes shaped in Q1-2024; final estimates.

HOW PERSONAL INCOMES SHAPED IN Q1 (FINAL ESTIMATE)

How did the personal incomes compare for Q1; between the second advance estimate and the third and final estimate. Let us start with the macro picture of current dollar GDP (nominal GDP), which increased by 4.5% or by $312.2 Billion, in the first quarter of 2024 to $28.27 Trillion; an upward revision of $13.2 Million from the previous estimates. The real story here is that the higher GDP growth in the third and final estimates has been triggered by higher nominal GDP estimates; and despite higher inflation impact.

Let us now turn to the current-dollar personal income (nominal terms), which saw an absolutely accretion of $396.8 Billion in the first quarter, which is a slight downward revision of $7.7 Billion compared to the second estimates. The increase essentially reflects increase in compensation (led by private wages and salaries), and personal current transfer receipts (let by government social benefits). There were no offsetting factors in Q1.

Let us now move to the disposable personal income (DPI). For Q1-2024 (third estimate), the DPI increased by $240.2 Billion (4.8%), which is a downward revision of $26.6 Billion compared to the second advance estimates. Real disposable personal income net of the inflation effect, also increased 1.3% in the first quarter of 2024, which is a downgrade of 60 bps over the second advance estimate for Q1 GDP.

The personal savings in the final estimate for Q1-2024 was lower compared to the second estimate. In Q1-2024, the personal saving stood at $777.3 Billion, a downward revision of $19.3 Billion compared to the second advance estimates. As a result, the personal savings rate, personal savings as a percentage of disposable personal income, was static at 3.8%.

UPDATES TO Q1 AND Q4 CORPORATE PROFIT NUMBERS

Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) actually fell by $47.1 Billion in the first quarter. This is a downward revision of $26.0 Billion compared to the second estimates. How did the profit performance of the financials and the non-financials pan out in the first quarter, as per the final estimates of corporate profits?

Profits of domestic US based financial corporations increased by $65.0 Billion in the final estimate of first quarter, a downward revision of $8.7 Billion compared to the second estimate for Q1-2024. The profits of domestic non-financial corporations (industrials and services) decreased by $114.5 Billion in Q1-2024; a down ward revision of $0.3 Billion compared to the second estimate. Rest of the world (ROW) profits increased by $2.3 Billion as per the third and final estimates of Q1-2024; a downward revision of $17.0 Billion compared to the second estimates.

HOW CME FEDWATCH REACTED TO Q1-GDP FINAL ESTIMATES

The US markets did not react too sharply to the US GDP data as it was largely along expected lines. On the positive side, if the GDP is being impacted by the monetary tightness, then it only means that the Fed objective is being achieved. Hence, the Fed should be on target for its first rate cut in September 2024. Here are the CME Fedwatch probabilities.

Fed Meet	325-350	350-375	375-400	400-425	425-450	450-475	475-500	500-525	525-550	550-575
Jul-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	10.3%	89.7%	Nil
Sep-24	Nil	Nil	Nil	Nil	Nil	Nil	6.2%	57.9%	35.9%	Nil
Nov-24	Nil	Nil	Nil	Nil	Nil	2.2%	24.2%	50.3%	23.4%	Nil
Dec-24	Nil	Nil	Nil	Nil	1.6%	18.4%	43.4%	30.5%	6.2%	Nil
Jan-25	Nil	Nil	Nil	0.9%	11.3%	32.8%	36.0%	16.5%	2.6%	Nil
Mar-25	Nil	Nil	0.6%	7.6%	25.1%	34.8%	23.4%	7.5%	0.9%	Nil
Apr-25	Nil	0.3%	3.8%	15.6%	29.6%	29.6%	16.2%	4.5%	0.5%	Nil
Jun-25	0.2%	2.4%	10.8%	23.9%	29.6%	21.6%	9.2%	2.1%	0.2%	Nil
Jul-25	1.1%	5.4%	15.6%	26.0%	26.7%	17.1%	6.6%	1.4%	0.1%	Nil

Data source: CME Fedwatch

The broad theme remains the same. The CME Fedwatch is expecting its first Fed rate cut in September 2024, at which point the market is assigning a probability of around 65% that the first rate cut could happen. This is a fair chance of it happening. By December 2024, there is a 64% probability that there would be two rate cuts. That is more optimistic than what the Fed has indicated, since the Fed has only guided for 1 rate cut in 2024.

However, the real action could be in 2025, when the US Fed could actually see the benefits of lower inflation coming on a sustainable basis. The short fall in rate cuts in 2024, if any, is likely to be made up in 2025. For the Fed, the good news is that the GDP growth is tapering and the consumer spending is under control. That will ensure that inflation will not continue to be rampant, something the Fed was always worried about. It looks like the Fed may be on target for its first rate cut in September and, probably, more aggressive rate cuts in 2025. That would give the RBI enough to chew about!