Final Estimate of US Q4-2023 GDP gets a boost at 3.4%

31 Mar 2024 , 10:19 AM

US Q4-2023 GDP FINAL ESTIMATE BEATS THE STREET

The third and final estimate of Q4 GDP growth came in at 3.4%, a sharp upgrade from the numbers reported in the first and the second estimate. Just to recap, The first advance estimate (FAE) of Q4-2023 GDP by the US Bureau of Economic Analysis (BEA), put out in end Jan-24, had pegged Q4-GDP at 3.3%. However, the second GDP estimate in end February 2024 had pegged the Q4-2023 GDP growth estimate 10 bps lower at 3.2%. Now, the final estimate of Q4-2023 GDP has come in at 3.4%; which is 10 bps higher than the first estimate and 20 bps higher than the second estimate. This is still lower than the GDP growth in the third quarter ended September 2023 at a surprisingly robust 4.9%; but it still holds up.

Macro Data	First estimate – Q4	Second estimate – Q4	Final estimate – Q4
Real GDP growth	3.3%	3.2%	3.4%
Current $ GDP	4.8%	4.9%	5.1%
Real GDI	–	–	4.8%
GDI-GDP Average	–	–	4.1%
GDPI	1.9%	1.9%	1.9%
PCE Price Index	1.7%	1.8%	1.8%
Core PCE Index	2.0%	2.1%	2.0%

Data Source: Bureau of Economic Analysis (All figures QOQ)

What is flattering about the three estimates of Q4-2023 GDP growth in the US is that the higher real GDP growth has been driven by higher nominal growth and not just by inflation control. That is a positive signal that there is actually overall growth happening in the US economy. The sharp growth in the gross domestic investment (GDI) at 4.8% is also an encouraging data point for the fourth quarter of 2023.

DISSECTING THE Q4 2023 GDP GROWTH

The third and final estimate of GDP growth for Q4-2023 at 3.4% is 10 bps higher than the first estimate and 20 bps higher than the second estimate. The positive takeaway is that the upward revision in the third estimate has come on the back of higher nominal GDP growth, which is a signal that genuine growth is visible in the US economy. The table below captures the break-up of the 3.4% GDP growth for fourth quarter, juxtaposed with recent 5 quarters.

GDP Data	Q3-2022 YOY (%)	Q4-2022 YOY (%)	Q1-2023 YOY (%)	Q2-2023 YOY (%)	Q3-2023 YOY (%)	Q4-2023 YOY (%) #
GDP Overall	2.7	2.6	2.2	2.1	4.9	3.4
GDP – Goods	7.9	6.2	-1.3	0.9	7.3	2.6
GDP-Services	2.5	2.5	3.2	1.9	2.9	2.8
Structures	-13.5	-9.6	8.9	7.7	10.0	10.4
Auto O/P	15.3	-1.2	14.7	15.4	-7.1	-21.8
GDP Ex-Auto	2.3	2.7	1.9	1.7	5.2	4.2
Non-farm GVA	2.8	2.8	1.8	2.0	5.8	3.8

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

As can be seen in the above table, the GDP growth in goods and services has been positive, although the Goods GDP growth has tapered compared to the sharp spike in the third quarter. On the other hand, the services GDP growth has been largely stable at 2.8%. If we look at the data, the pressure on GDP appears to have come from the contraction in auto output and tepid growth in farm output. That explains why the non-farm GVA is higher at 3.8%, while the GDP ex-auto is actually up 4.2% in the fourth quarter. Net of automobiles and motor vehicles, the US GDP has grown at an impressive rate in Q4-2023.

HAS THE US ECONOMY AVOIDED HARD LANDING?

If one looks at the final estimate of 2023 GDP, it can be safely assumed that the much-feared hard landing may have been finally overcome. Remember, that the upgrade to the Q4 GDP by 20 bps in the final estimate at 3.4% was largely driven by an upgrade to nominal GDP growth, which is an actual signal of output picking up. The Fed has not yet embarked on rate cuts. After hiking rates by 525 basis points between March 2022 and July 2023, the Fed has maintained status quo for the last 8 months, following the “Higher for Longer” policy. However, even that did not deter the GDP growth rate. Now, we also have the full  year GDP data for 2023, which has come in at a healthy 2.5%, which is a good 60 bps higher than 1.9% in 2022. Clearly, hard landing is not an economic debate any longer.

Q4-2023 GDP STORY – LEADERS AND LAGGARDS

The third and final estimate of US Q4 GDP has pegged the GDP growth at 3.4%. That is 20 bps higher than the second estimate and 10 bps higher than the first advance estimate of 3.3%. This can be attributed to more comprehensive data points coming in. Here is a granular look at the final GDP winners and losers for Q4-2023.

• The real GDP for Q4-2023 was revised up by 20 bps over the second estimate from 3.2% to 3.4% in the final estimate. The update primarily reflected upward revisions to consumer spending and non-residential fixed investment during the month, with housing still under pressure. However, this was partly offset by a downward revision to private inventory investment
• Let us now turn to the industry-wise analysis of the winners and losers as per the third and final estimate for Q4-2023 GDP in the US. In terms of contribution to GDP, the private goods-producing industries saw a spike of 7.0%, private services-producing industries witnessed an increase of 2.6%; while the government contribution increased 3.1% for the fourth quarter. Overall, 18 out of the 22 industry groups contributed to the fourth-quarter increase in real GDP; with pressure coming from the other 4 industries.
• Within the realm, of private goods producing industries, the leading contributors to the increase were non-durable goods manufacturing. This non-durable goods spike was largely led by petroleum, coal products and chemical products. There was also positive contribution from durable goods manufacturing, largely led by the manufacture of machinery and its contribution to the Q4 GDP.
• Within the realm of private services-producing industries, the major contributors to the increase were retail trade. This segment was largely led by the motor vehicle and parts dealers. Other services that showed strong and perceptible growth in the quarter were healthcare and social assistance (ambulatory health care services), utilities, and professional, scientific, and technical services. The last item was largely driven by computer systems design and related services.

The residual increase in real GDP came from government spending related output with visible increases in state and local government as well as federal government.

HOW PERSONAL INCOMES SHAPED UP IN Q4 (FINAL ESTIMATE)

Let us start with the macro picture of current dollar GDP (nominal GDP), which increased by 5.1% or by $346.9 Billion, in the fourth quarter to $27.96 Trillion. This is an upward revision of $12.4 Billion from the previous estimate at the end of February 2024. Interestingly, if you compare the third estimate with the first advance estimate and the second estimate, then the nominal GDP is actually higher, and real GDP has only followed the trend.

Let us now turn to the current-dollar personal income (nominal terms), which saw an absolutely accretion of $230.2 Billion in the fourth quarter, with is an upward revision of $10.7 Billion from the second advance estimate. The increase essentially reflects increase in compensation, personal income receipts on assets, and proprietor’s income. However, this as partially offset by decrease in personal current transfer receipts.

Let us now move to a picture of the surpluses as depicted by the disposable personal income (DPI). For Q4, the DPI increased by $190.4 Billion (3.8%). That is a downward revision of $12.1 Billion compared to the second advance estimate. Real disposable personal income net of the inflation effect, also increased 2.0% in the fourth quarter, which is a downward revision of 20 bps compared to the second advance estimate.

The personal savings were slightly higher in the final estimate, compared to the second estimate. For instance, the personal saving stood at $815.5 Billion in Q4-2023, which is an upward revision of $6.3 Billion compared to the second advance estimates. The personal saving rate (defined as personal saving as a share of disposable personal income) stood at 4.0% percent in the fourth quarter, which is 10 bps higher than second advance estimate. In short, the personal savings rate has just reverted to its level of the first estimate.

GROSS DOMESTIC INCOME AND CORPORATE PROFITS

Let us look at the gross domestic income and the corporate profit story for the fourth quarter of 2023 in the US economy and the signals for the economy as a whole. Here are the key takeaways.

• The real gross domestic income (GDI) increased 4.8% fourth quarter, which is sharply higher than the tepid increase of just 1.9% in the third quarter. In the US, one supplemental view of the national output is the arithmetic average of real GDP (gross domestic product) and real GDI (gross domestic income). Here equal weights are assigned to real GDP and real GDP. That combined measure has increased by 4.1% in the fourth quarter of 2023 as compared to just 3.4% in the third quarter of 2023.
• If you look at the profits from current production (corporate profits with inventory valuation and capital consumption adjustments), that has seen an accretion of $133.5 Billion in the fourth quarter. This compares very favourably with the increase of $108.7 Billion during the third quarter of 2023.
• The Profits of domestic financial corporations showed an increase of $5.9 Billion in the fourth quarter of 2023, which is lower than the increase of $9.0 Billion in the third quarter. It is a clear sign that domestic financial institutions are under some sort of pressure and that can be attributed to the lag effect of the mini banking crisis that the US economy faced at the start of year 2023.
• Finally, the profits of domestic nonfinancial corporations increased by $136.5 Billion, compared with an increase of $90.8 Billion in the third quarter. However, rest of the world profits decreased $8.9 Billion, in contrast to an increase of $8.8 Billion in the third quarter. Clearly, the Red Sea crisis as well as the reality of Japan and UK dipping into a mini recession in the last quarter are signs that global contribution to profits is falling.

HOW WILL RBI INTERPRET THIS Q4-2023 US GDP UPDATE?

India would be looking less at the real GDP data and more at the nominal GDP data, which has actually increased sharply in the final estimate as compared to the second estimate. At 5.1%, it is the nominal GDP that is driving growth and that is good signal for the US economy. One message that comes from the combination of PCE data and GDP data is that higher inflation is far from being done and dusted in the US, so one can still expect impact on real GDP. However, the nominal GDP growth is likely to be robust, and that rules out any chances of a hard landing for the US economy. India may not be overly concerned about the higher inflation implication in the final estimate, since it is largely driven by the temporary hurdles caused by the Red Sea crisis. Things should normalize automatically over time.

RBI would be keeping one eye on the extent of global hawkishness and the US economy. However, it does look like the penchant for global hawkishness is reducing and US growth is back on track. Ironically, Japan appears to be moving into positive rates after 17 year, but no other major economy is likely to follow that path. That gives the RBI the required time to start seriously thinking of rate cuts this year. It is more likely that rate cuts would happen only in H2-2024; once the new government is in place and the final budget has also been presented by the new finance minister. The revival in US nominal growth has positive implications for Indian exports; which has seen some pressure in the last quarter. For now, it looks like India and the US are the only two large economies that are growing at a robust clip; and nobody is really complaining about it.