First estimate for US Q2GDP comes in at an impressive 2.4%

28 Jul 2023 , 06:58 AM

The third and final estimate for US GDP for the first quarter of calendar 2023 ended March 2023 had come in at an upgraded 2.0%. That was much better than expected and was the first step to dispel the recession concerns. Now, the first advance estimate for the second quarter ended June 2023 was announced on July 27, 2023 by the US Bureau of Economic Analysis (BEA). At 2.4%, it is much better than market expectations in the 1.8%-2.0% range.

Here it needs to be remembered that the US BEA typically puts out 3 estimates for the GDP for 3 successive months. With the First Advance estimate for Q2-2023 out, the second estimate and the third estimate will be out towards the end of August and September respectively. In the first quarter, each of the estimates was an improvement and upgrade over the previous estimate. A similar trend is now being expected in Q2-2023 also.

One can argue that this is still lower than the 2.6% recorded in terms of GDP growth in the fourth quarter of 2023, but it is higher than the 2% reported in the first quarter. Also, the recent quarters have borne the brunt of the rate hikes plus the lag effect of rate hikes. From that perspective of 2.4% GDP growth is impressive. Also, this is only the first advance estimate with two more estimates to come out in the coming months. 

Macro level picture of Q2-2023 GDP in the US

The table below captures the key data points across the last 5 quarters to give a comparative perspective.

Variable	Q3-2022	Q4-2022	Q1-2023	Q2-2023
Real GDP growth	3.2%	2.6%	2.0%	2.4%
Goods GDP growth	7.3%	5.9%	-1.4%	2.6%
Services GDP growth	3.9%	2.4%	3.5%	2.3%
Nominal GDP growth	7.7%	6.6%	6.1%	4.7%
Private Fixed Investment	-3.5%	-3.8%	-0.4%	4.9%

 

Data Source: US Bureau of Economic Analysis (BEA)

There are a few things that stand out in the current quarter. In the previous quarter, the growth in GDP was led by services with goods lagging in the negative. This time around in the second quarter, we see balanced growth in goods GDP and services GDP. Secondly, the impact of inflation has sharply reduced and that has boosted the real GDP despite tapering of nominal inflation. For instance, in Q4-2022, the nominal GDP growth rate was a healthy 6.6%, but the real GDP growth was at 2.6% due to the high impact of inflation. Even in Q1-2023, the nominal growth was at 6.1% while real GDP growth stood at 2.0%. In contrast, the real GDP in Q2-2023 has come in at a robust 2.4%, despite nominal GDP at just 4.9%. Of course, on the one hand, the falling nominal growth does hint at weakening growth impulses. But it also means that the inflation has been much better contained in every successive quarter. 

What explains the increase in real GDP in Q2-2023?

Let us first look at the big picture of the GDP story in the June 2023 quarter, based on the first advance estimates for Q2-2023. The 2.4% robust growth in real GDP (nominal GDP adjusted for inflation) can be largely explained by an increase in consumer spending, non-residential fixed investments, state and local government spending and private inventory investment. However, this was largely offset by lower exports and lower residential fixed investments. Imports fell and that had a positive impact on the GDP growth.

Let us now turn to consumer spending which saw increases in both services and in goods. The major service sector contributors to the GDP growth were housing & utilities, healthcare financial services, insurance, and transport. Within goods, the boost was led by recreational goods, vehicles, and gasoline products. In fact, if you compare the second quarter to the first quarter, the higher GDP growth can be largely explained by upturn in private inventory investment, and acceleration of non-residential fixed investment. However, these were partially offset by weak exports and deceleration in consumer spending during the quarter.

Current dollar GDP, personal incomes, and disposable incomes

Here are some of the key takeaways that we decipher from the data on GDP and income levels.

• In the Q2-2023, the current dollar GDP (nominal)increased by 4% annualized resulting in nominal GDP accretion of $305.2 billion in the quarter. In comparison, the Q1-2023 had seen 6.1% increase in nominal GDP resulting in nominal GDP accretion of $392 billion.

   

• In the Q2-2023, the PCE inflation (used by Fed for rate decisions), stood at 2.6% compared to 4.1% PCE inflation in Q1-2023. In Q2-2023, the Core PCE inflation (excluding food and fuel), stood at 3.8% compared to 4.9% PCE inflation in Q1-2023.

   

• Current dollar personal income in Q2-2023 increased by $236.10 billion compared to an increase of $278 billion in the Q1-2023 quarter. Clearly, there has been a tapering in the income levels in Q2 due to the lag effect of the Fed tightening in the economy.

   

• Disposable personal income in Q2-2023 increased by $248.20 billion or 5.2% compared to an increase of $587.9 billion or 12.9% in Q1-2023 quarter. Real disposable persona incomes in the second quarter grew by 2.5% as compared to 8.5% in the first quarter, once again showing clear signs of the impact of Fed tightening on disposable incomes.

   

• Personal savings stood in Q2-2023 at $869.50 billion compared to $840.90 billion in Q1-2023 quarter. The personal savings rate as a share of personal disposable income improved to 4.4% from 4.3% in the previous quarter. The Fed tightening and the banks tightening credit has made people more cautious about spending.

To sum up the story, the spike in the rates at a fairly rapid rate, combined with the lag effects, has led to a fall in income levels and disposable income levels. However, there has been a perceptible fall in the inflation levels even as savings rate have gone up amidst sense of caution among the investors.

Insights we gleaned from GDP data for Q2-2023

Real gross domestic product increased at an annual rate of 2.4% in Q2-2023, according to the advance estimate or the first estimate put out for the quarter by the BEA. The latest estimate is stronger than the expected 1.8% growth and is a faster pace than the Q1-2023 GDP third estimate of 2.0%. This brings back the debate on the likely US recession to the foreground. The data can be interpreted in two ways. Here is why.

Firstly, there are signals of recession since the nominal GDP has taken a hit and the gains in real GDP are more due to inflation being control. A lot will depend on how quickly, the US economy is able to bounce back into growth mode, once the rates top out. Just as inflation can be sticky, even low growth can be extremely sticky if the monetary policy trajectory is uncertain. On the other hand, the positive takeaway is that that the inflation is coming under control with PCE inflation also tapering in the June quarter. This raises hopes that the Fed may (as expected by the CME Fedwatch) call a top on rates. For now, we need to watch other data points like the PCE inflation for June and the updates to the GDP for Q2-2023.

What does the GDP data mean for the Fed and for India?

Will the latest GDP data impact the Fed rate moves going ahead. Fed was on pause mode in June but has got back to a rate hike in July. However, there are two positive takeaways for the Fed in the GDP data. Firstly, nominal GDP growth has come down, which is what the Fed wanted anyways. At the same time, much of the higher GDP of 2.4% in Q2-2023 is on account of sharply lower inflation. These data points, combined with indications of a sharp fall in the PCE inflation, should urge the Fed to serious consider the possibility of calling a top on Fed rates at the current level of 5.25%-5.50%. However, the Fed is likely to bide its time rather than jump in and make any hasty decision. It has the luxury of taking more time.

What does this data mean for India and for RBI policy? The RBI has apparently already charted the path but it is certainly keeping one eye on the extent of global hawkishness. Obviously, the focal point for the RBI would be the Fed action, considering its reach, influence, and the strong economic inter-linkages with India. RBI has held status quo in April and June despite hawkishness displayed by the US Fed, ECB, and the Bank of England. The RBI is likely to stay put, unless the erratic monsoon really spikes food inflation.

For now, India will focus more on growth and allow inflation to control itself based on the lag effects of monetary tightening. However, the RBI would still be worried about a bounce in oil prices and spike in food prices, especially vegetables and cereals. It is likely that, after the latest GDP data from the US, the RBI will use the long rope to extent the pause further. At this stage, the RBI can surely afford to do that!