First Advance Estimate for US Q3-2023 GDP surges to 4.9%

27 Oct 2023 , 10:00 AM

On 26th October 2023, when the United States Bureau of Economic Analysis (BEA) announced the first advance estimates for US GDP for the September quarter (Q3-2023), expectations of higher GDP growth were already in the air. In fact, the street was expecting the Q3 GDP to surge sharply from 2.1% in Q2 to 3.5% in Q3. However, the actual GDP growth data came in much beyond all expectations at 4.9%. Of course, this is just the first advance estimate of Q3 GDP and there will be two more estimates issued at the end of November and December respectively. However, the message is very clear. The Q3 US GDP is going to be sharply higher than Q2 GDP. That would also mean that in the next meeting, the Fed may hike its GDP estimates for 2023. In the previous FOMC (Federal Open Markets Committee), the Fed had already hiked the GDP growth estimate by more than 100 bps to 2.1% for 2023. With the Q3 estimates showing such robust growth upgrades cannot be ruled out. Would it mean more rate hikes by US Fed? We come back to this question later. 

Hard landing for the US economy; oh really?

After the GDP growth for Q1 and Q2 averaged around 2.1%, this surge of GDP growth to 4.9% in Q3 comes as a big positive boost to the US growth story. The Atlanta Fed had already hinted at higher growth in Q3 2023 but this 4.9% growth is typically above all possible estimates. The US BEA puts out 3 estimates for the GDP over 3 successive months. The First Advance estimate for Q3-2023 has just been put out at a whopping 4.9%. The second estimate will be put out in the end of November and the third and final estimate of Q3 GDP will be out in end of December 2023. While, there could be some adjustments to the final GDP number, the undertone is that the final GDP for Q3 would be substantially higher than Q1 and Q2. One thing emerges clearly from these numbers. The so-called hard landing now looks more like a myth with most economists appearing to have totally misjudged the resilience of the US economy. Needless to say, a robust US economy is positive news for the world economy in general; and for EMs in particular.

Remember, this is growth in real GDP for Q3-2023

What explains this frenetic surge of 4.9% in real GDP in Q3-2023? Ironically, this comes at a time when the US economy was supposed to be gradually slipping into a recession on the back of persistent spikes in the interest rate. Despite these challenges, the GDP growth in Q3 has come in at 4.9% as per the first advance estimates. One factor that has surely resulted in this surge in real GDP is the lower inflation on an average basis. After real GDP is nominal GDP net of inflation. So, even a sharp fall in inflation contributes to the higher real GDP growth. However, this is not just about lower inflation support, but about actual growth across various business verticals too. Here is a quick look at growth drivers in Q3.

The increases in real GDP in the third quarter reflects a surge in consumer spending, investments in private inventory, improved exports, and sustained spending by local and state governments in the US. Residential fixed investments also picked up in the quarter. On the growth front, there were some pressure points too. There was a fall in non-residential fixed investments and imports were higher in the quarter. By the way, this 4.9% GDP growth is the highest recorded by the US in any quarter since the fourth quarter of 2021.

What has triggered this GDP surge in Q3-2023?

We have already seen the broad drivers of GDP growth in the previous paragraph. Let us now break it up further and take a more granular picture. Here are some key takeaways on the GDP growth front in Q3-2023.

1. Increases in consumer spending were a manifestation of a spike in services and goods. The services led the growth engine via housing and utilities, health care, financial services, insurance, food services, and accommodations. Within the category of goods, the spike was led by nondurable goods as well as recreational goods and vehicles. 

    

2. The surge in housing and utilities was triggered by spending on electricity. In the realm of healthcare, the increase was represented by spike in outpatient services and hospital and nursing home services. Let us now turn to where the growth came from in the financial services space. 
    
3. In the realm of financial services and insurance, the increase was led by imputed financial services. There was also a spike in financial service charges, fees, and commissions. However, one must check how these triggers have trended in the last few quarters to get a fuller perspective. 

    

4. There was a sharp surge in the growth of other nondurable goods. This was largely led by prescription drugs, based on private trade data, and by recreational items, based on Census MRTS data. Increase in recreational goods and vehicles was led by computer software.

    

5. Within private inventory investment, the increase was in non-farm inventories, led by nondurable goods manufacturing (mainly petroleum and coal product industries). Let us look at the foreign trade aspect. The increase in exports was led by non-automotive capital goods, automotive vehicles, and air transportation in the services space.

    

6. The higher state and local government spending reflected increases in employee compensation, as well as gross investment in structures. On the other hand, the increase in federal government spending was reflective of an increase in defence and non-defence spending.

The bottom line is; how did GDP pan out in the US in the third quarter in terms of actual numbers. For the third quarter ended September 2023, the current dollar GDP rose by 8.5%, or you can call it a dollar accretion of $560.50 billion. This takes overall nominal GDP to a level of $27.62 trillion. This is sharply higher than the second quarter wherein the nominal GDP had grown by just 3.8% or $249.40 billion accretion in dollar terms.

Personal consumption growth appears to  be the big driver of GDP growth in the third quarter. For instance, the price index for gross domestic purchases increased 3.0% in the September quarter compared to just 1.4% in the second quarter. For Q3, the PCE index rose by 2.9% as compared to 2.5% in the previous quarter. However, the good news is that the core PCE price index rose by just 2.4% in Q3 as compared to 3.7% in Q2, giving indications that the Fed was finally coming to grips with the surge in core inflation. 

How did personal incomes shape up in the Q3?

For the quarter ended September 2023, the current-dollar personal income increased by $199.5 billion in dollar terms as compared to $239.6 billion in the second quarter. Personal income receipts in the quarter were positively impacted by compensation, proprietor’s income, income receipts on assets, and rental income. This was partially offset by the decrease in personal current transfer receipts. Let us now turn to disposable personal income, a key metrics of spending power in future.

For the September 2023 quarter, the disposable personal income (DPI) increased by $95.8 billion, or 1.9%. This is sharply lower than the dollar increases of $296.5 billion, or 6.1% in the second quarter ended June 2023. Real disposable personal income (net of the inflation effect) witnessed a fall of 1.0% in contrast to an increase of 3.5% in the previous quarter ended June 2023. A quick word on the personal savings rate too is warranted here.

In sync with the fall in disposable income levels, even the personal savings are lower in this quarter. For instance, for the September 2023 quarter, the personal savings stood at $776.9 billion compared with $1.04 trillion in the second quarter, hinting at a clear and perceptible fall. If you look at the ratio of personal savings rate as a share of disposable personal income, then that ratio has fallen sharply from 5.2% in Q2 to 3.8% in Q3. 

How will the Fed interpret GDP data

For the Fed, this is largely a mixed piece of news and here is why. Firstly, the Fed would be pleased that it has avoided the much feared hard landing. For now, the Fed can state with confidence that the risks of a hard landing are now fairly remote. At least, the growth rate of 4.9% is not consistent with a recession. That now looks  increasingly clear. This is good news because it implies that the US has been able to raise rates and keep inflation in check without disrupting GDP growth in any serious way. That sounded impossible about a year back, but now looks very likely.

Clearly, the soft landing is no longer a mirage, but that also puts the Fed in a very difficult spot with respect to future trajectory of rates. Also, with growth picking up so fast, it is very unlikely that inflation will fall sharply from these levels. What the Fed has indicated in recent speeches by Jerome Powell is that the Fed would not be in a hurry to hike rates. Instead, they are likely to hold on to the current rates for a much longer time on pause. However, the Fed had already indicated that rate cuts were off the table for now and for quite a few months to come. That is one reason why the bond  yields in the US had spiked so sharply in recent weeks.

While the FOMC members may be divided about future rate hikes, this spike in GDP poses a major problem. If this GDP growth is the new normal, then inflation and consumer spending is unlikely to come down in a hurry. The causal functions that the Fed was betting would not work now. It is very likely that, going ahead, the rate cuts may become less effective and that could be the one reason for not hiking rates. However, with growth spiking to 3.9%, the Fed may want front end the last rate hike of 25 bps in the November policy itself.

What does this US GDP number mean for India?

What does this data mean for RBI policy? Back in February 2023, the RBI had emphatically voted in favour of growth over inflation. That has been the consistent policy in the last 8 months. RBI is certainly keeping one eye on the extent of global hawkishness and that has already taken a mild form of extended pause and ruling out of rate cuts. RBI is also likely to effectively rule out rate cuts in the foreseeable future. The November 01, 2023 monetary policy could assume added significance for this very reason.

Inflation has fallen sharply in the last 2 months, so the RBI has some cushion to work with. However, median inflation still stays well above the RBI target of 2% long term inflation. The stable GDP in the US means that the Fed would certainly go for another rate hike in November or in December this year, while anything beyond that remains fairly ambiguous and ambivalent too. For the RBI, this means greater chance of monetary divergence. Whether the RBI decides to go for a rate hike immediately or wait for longer, remains to be seen. It remains to be seen when the cautious language of the RBI will translate into an additional rate hike. If growth remains robust, the pressure may soon start building up.