First Advance Estimate of US Q2-2024 GDP double to 2.8%

26 Jul 2024 , 10:19 AM

US Q2-2024 GDP GROWTH ADVANCE ESTIMATES DOUBLE TO 2.8%

The first advance estimate of US GDP for the June 2024 quarter came in like the proverbial Manna from Heaven. After languishing at 1.4% in the first quarter ended March 2024, the first advance estimate of GDP growth in Q2-2024 doubled to 2.8%. While that is sharply higher than the Q1-2024 GDP, it is still lower than the 3.4% GDP growth reported by the US economy in Q4FY23 and the impressive 4.9% GDP growth reported by the US economy in Q32023. The current year growth is happening on a much higher base.

Of course, this is the first advance estimate of Q2 GDP for the US economy. As more data flows in, this estimate will be subjected to revisions and will be reported as the second estimate and the final estimate towards the end of August and September respectively. However, the early indications from the Atlanta Fed GDP were hinting at a bounce in GDP growth in Q2-2024. That has certainly materialized. For the time being, we must await the next two estimates of Q2-2024 GDP to get the comprehensive picture.

IMPLICATIONS OF US Q2-2024 GDP GROWTH AT 2.8%

A quick look at the significance of this GDP number. There are three key interpretations for the US GDP data. The first interpretation is more internalized for Indian business. The US is one of the largest trading partner and India runs the biggest surplus with the US. Strong GDP growth means the consumer demand and the capital investment demand would be robust. That is good news for Indian exports of goods and services. Secondly, the strong US GDP has major implications for the US dollar as it is likely to strengthen the dollar.

That typically leads to weakening of other developed and emerging economies. The third and very important implication is on the Fed interest rate trajectory. The Fed is now expected to cut rates in September. However, a strong GDP means that the higher growth and tight labour market could keep consumption buoyant. That is not consistent with lower inflation and hence the Fed may be a little more cautious on rate cuts in the current calendar year. For that, we have to wait and watch till September this year.

COMPARING Q2-2024 GDP GROWTH WITH PREVIOUS QUARTERS

The table below, breaks up the GDP growth into user end items like private consumption expenditure, private domestic investment, and government spending to spot the trends of the last 4 quarters.

GDP Data	Q3-2023 YOY (%)	Q4-2023 YOY (%)	Q1-2024 YOY (%)	Q2-2024 YOY (%) #
Private Consumption Expenditure	2.4	2.5	2.7	2.4
Gross Private Domestic Investment	0.3	2.0	3.7	6.4
Exports	-0.3	1.5	1.1	3.4
Imports	-2.7	-0.1	1.5	5.0
Government Spending & Investment	4.6	4.2	2.9	3.3
Nominal GDP Growth	5.9	5.7	5.8	5.8

Data Source: US Bureau of Economics (BEA) # = First Advance Estimate

Here are the key takeaways from the break-up of the GDP from the user perspective.

• The increase in real GDP in Q2-2024 from 1.4% to 2.8 % sequentially; reflected an increase in the consumer spending, private inventory investment, and non-residential fixed investments. Imports increased during this period, and it is a subtraction from the GDP growth traction.
• The increase in consumer spending by 2.4% in Q2-2024 was reflective of the increases in goods and services. Within services, the leading contributors to the growth were healthcare, housing, utilities, and recreation services. Within goods, the leading contributors were motor vehicles and parts, recreational goods and vehicles, furnishings and durable household equipment, and gasoline and other energy goods.
• What were the triggers for the growth in private inventory? It basically reflected increase in wholesale trade and retail trade industries that were partly offset by a decrease in mining, utilities, and construction. Within the ambit of non-residential fixed investment, there was an increase in equipment and intellectual property products. However, this was offset by a decrease in structures. The import spike was led by capital goods (ex-auto).
• To sum up, how did the GDP growth in Q2-2024 double over the Q1 number at 2.8%? The acceleration in real GDP in the second quarter reflected an upturn in private inventory investment and an acceleration in consumer spending. The partial offsetting impact came from a downturn in residential fixed investment.

Let us turn to the break-up of GDP in Q2 as compared to the first quarter of 2024.

DISSECTING THE Q2 2024 US GDP GROWTH  – FIRST ADVANCE ESTIMATES

With the first advance estimate of Q2-2024 GDP out, there is a first cut to compare how the GDP growth has moved in the last 6 quarters on yoy basis and what triggered this move. The first advance estimate of Q2-2024 GDP growth came in at 2.8%, which is 140 bps higher than the final Q1 figure. The sequential GDP growth in the last 4 quarters were 4.9%, 3.4%, 1.4% and 2.8%. A clearer picture will emerge once the second and third GDP update comes in. Here is a quick look at the data.

GDP Data	Q1-2023 YOY (%)	Q2-2023 YOY (%)	Q3-2023 YOY (%)	Q4-2023 YOY (%)	Q1-2024 YOY (%)	Q2-2024 YOY (%) #
GDP Overall	2.2	2.1	4.9	3.4	1.4	2.8
GDP – Goods	-1.3	0.9	7.3	2.6	-3.8	5.5
GDP-Services	3.2	1.9	2.9	2.8	3.0	2.1
Structures	8.9	7.7	10.0	10.4	9.7	-1.1
Auto O/P	14.7	15.4	-7.1	-21.8	-2.7	28.5
GDP Ex-Auto	1.9	1.7	5.2	4.2	1.5	2.3
Non-farm GVA	1.8	2.0	5.8	3.8	1.0	3.3
Goods Share	-0.4	0.3	2.3	0.8	-1.2	1.7
Services Share	1.9	1.1	1.7	1.7	1.8	1.3

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

What exactly has led to a sharp spike in the GDP growth in Q2-2024, as compared  to a tepid level of 1.4% in the sequential previous quarter.

• The growth in GDP for physical goods bounced back sharply to 5.5% from a deeply negative -3.8% in the first quarter. We now have to await the second and third estimate of GDP. In the last two sequential quarters, this figure had been +2.6% and -3.8%. It is an outcome of demand bouncing back as some of the oil driven constraints in the Middle East and West Asia.
• 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 Q2-2024 stood at 2.1% as compared to 3.0% in the sequential previous quarter and 2.8% before that. Clearly, the momentum in services appears to be waning in recent months. These data points also go through revisions, so that could be the interesting story.
• The auto output turned around to 28.5% in the quarter after being in the negative zone for 3 quarter sin a row. We have to wait and see how the second and final estimates work out for the quarter. Since the turnaround is very rapid, we could see a lot of adjustments when the second and third estimates are out.
• The non-farm GVA (gross value added) rose to 3.3% in Q2-2024 in the first estimate. However, the non-farm GVA is still sharply lower compared to the previous year. This shows a sharp spike in the industrial output and that is also reflected in the sharp spike in the goods output.
• Finally, let us look at the last two rows, which capture the contribution of goods and services to the change in GDP. GDP goods is back to having a positive impact on the GDP growth after briefly making a negative contribution in the first quarter. On services, the impact continues to be positive, although the overall impact is lower as compared to the previous 4 quarters.

Let us now turn to how the personal incomes shaped in Q2-2024; first advance estimates.

HOW PERSONAL INCOMES SHAPED IN Q2 (FIRST ADVANCE ESTIMATE)

How did the personal incomes compare for Q2; as compared to the first quarter. Let us start with the macro picture of current dollar GDP (nominal GDP), which increased by 5.2% or by $360 Billion, in the second quarter of 2024 to $28.63 Trillion. The first quarter had seen nominal GDP growing at just about 4.5% or $312.2 Billion. In Q2, it was not just the higher nominal GDP, but also the lower inflation. PCE index for Q2 rose by just 2.6%, compared to 3.4% in the first quarter. Even core PCE inflation in Q2-2024 was 80 bps lower.

Let us now turn to the current-dollar personal income (nominal terms), which saw an absolutely accretion of $237.6 Billion in the first quarter. This compares with an increase of $396.8 billion in the first quarter. The increase essentially reflects increase in compensation (led by private wages and salaries), and personal current transfer receipts (let by government social benefits).

Let us now move to the disposable personal income (DPI). For Q2-2024 (first advance estimate), the DPI increased by $186.3 Billion (3.6%), as compared to $240.2 billion or 4.8% in the first quarter. Real disposable personal income net of the inflation effect, also increased 1.0% in the second quarter of 2024, compared with 1.3% in the Q1 GDP.

The personal savings in the first advance estimate for Q2-2024 stood at $720.5 billion. This is relatively lower compared to $777.3 Billion in the first quarter. As a result, the personal savings rate, personal savings as a percentage of disposable personal income, was lower at 3.5%; as compared to 3.8% in the first quarter (Q1-2024).

HOW CME FEDWATCH REACTED TO Q2-GDP FINAL ESTIMATES

The US benchmark 10-year bond yields and the US dollar index tapered post the GDP announcement and that could be because it reduces the probability of aggressive rate cuts by the US Federal Reserve. Here are the CME Fedwatch probabilities.

Fed Meet	300-325	325-350	350-375	375-400	400-425	425-450	450-475	475-500	500-525	525-550
Jul-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	6.7%	93.3%
Sep-24	Nil	Nil	Nil	Nil	Nil	Nil	0.3%	10.2%	89.6%	Nil
Nov-24	Nil	Nil	Nil	Nil	Nil	0.2%	6.3%	58.9%	34.6%	Nil
Dec-24	Nil	Nil	Nil	Nil	0.1%	5.7%	53.6%	37.0%	3.5%	Nil
Jan-25	Nil	Nil	Nil	0.1%	4.0%	38.6%	42.2%	14.0%	1.1%	Nil
Mar-25	Nil	Nil	0.1%	3.2%	31.4%	41.5%	19.9%	3.8%	0.2%	Nil
Apr-25	Nil	Nil	1.7%	18.4%	36.8%	29.9%	11.2%	1.9%	0.1%	Nil
Jun-25	Nil	1.2%	12.9%	30.8%	32.1%	17.3%	4.9%	0.7%	Nil	Nil
Jul-25	0.5%	6.0%	20.2%	31.3%	26.1%	12.3%	3.2%	0.4%	Nil	Nil
Sep-25	5.3%	17.6%	29.3%	27.1%	14.8%	4.9%	0.9%	0.1%	Nil	Nil

Data source: CME Fedwatch

The CPI inflation falling sharply from 3.3% to 3.0% in the month of June was a big trigger for the Fed to closely consider rate cuts in September. While the GDP has bounced back, the consumer expenditure is still lower and the hard landing has been avoided Here is a quick dekko at how the rate cut probabilities have panned out at the end of July 25, 2024.

• With rate hikes off the agenda, we focus on rate cut probability in 2024 first. Currently, the CME Fedwatch has assigned a 100% probability that the first rate cut will happen in September; higher than 98% last week. For now, July rate cut has a probability of just about 6.7%; which is insignificant. However, by December 2024, the CME Fedwatch is pencilling in a 98.9% probability of 2 rate cuts; higher than the probabilities indicated in the previous week.
• What about the CME Fedwatch expectations stack for 2025? By July 2025, the CME Fedwatch is factoring in 96.4% probability of at least 4 rate cuts, slightly higher compared to the probabilities in the previous week. In addition, the CME Fedwatch is also assigning a probability of 94.9% probability of 5 rate cuts by September 2025. These probabilities will evolve more realistically once Fed embarks on its first rate cut this year.

The million dollar question is whether the Fed would really be as aggressive as the CME Fedwatch is suggesting? Probably not!

WHY THE FED MAY NOT BE AS AGGRESSIVE ON RATE CUTS?

If you look at the rate cut path suggested by the CME Fedwatch, it looks to be too aggressive to be true. In reality, the US Federal Reserve may not share the same enthusiasm. More than half the members of the FOMC are still veering towards the hawkish side. Also, a lot will depend on how the initial reaction of the market is. For instance, if the rate cuts trigger the return of inflation, the Fed would most likely do a rethink. For now, even with status quo, the US economy is in fine fettle.

For the Fed, even 2 rate cuts in 2024 may not be on the table for now. They will start rate cuts in September and give themselves around 3 months to assess the situation. Any further action will be taken after that. The Fed is unlikely to share the dovish exuberance of the CME Fedwatch.