First Estimate of US Q4-2023 GDP surprises positively at 3.3%

28 Jan 2024 , 06:56 AM

US Q4-2023 GDP (FAE) THRILLS ON THE UPSIDE

The first advance estimate (FAE) of Q4-2023 GDP had just been put out by the US Bureau of Economic Analysis (BEA). As per the latest data, the projected GDP growth for the fourth quarter ended December 2023, is expected at 3.3% on a yoy basis. This sharply higher than the street expectations. As per the estimates of the Atlanta GDP, one of the most authentic sources of GDP estimates, the fourth quarter was expected to veer around 2.0% to 2.2%. The First advance estimate at 3.3% is sharply higher than that and is indicative of a lot of hidden momentum in the US economy. The table below captures the break-up of the 3.3% GDP growth for fourth quarter, juxtaposed with the recent six 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	3.3
GDP – Goods	7.9	6.2	-1.3	0.9	7.3	4.8
GDP-Services	2.5	2.5	3.2	1.9	2.9	2.5
Structures	-13.5	-9.6	8.9	7.7	10.0	3.6
Auto O/P	15.3	-1.2	14.7	15.4	-7.1	-22.8
GDP Ex-Auto	2.3	2.7	1.9	1.7	5.2	4.1
Non-farm GVA	2.8	2.8	1.8	2.0	5.8	3.7

Data Source: US Bureau of Economic Analysis (BEA)

As can be seen in the above table, the GDP growth in goods and services has been positive, although the Goods GDP has picked up momentum in the last few quarters. On the other hand, the services GDP has been largely stable around the median. If we look at the data, the pressure on GDP appears to have come from the negative growth in auto output and in farm output. That explains why the non-farm GVA is higher at 3.7%, while the GDP ex-auto is actually up 4.1% in the fourth quarter. In short, net of automobiles and motor vehicles, the US GDP has been growing at a very impressive rate.

TWO QUESTIONS ON GDP – FED ESTIMATES AND HARD LANDING DEBATE

There appears to be two key question that arise after the fourth quarter GDP for the US economy surprised on the upside. Of course, these are first advance estimates and will go through two more revisions. However, if you go by past experience of revisions, the upgrades or downgrades are in the range of 20 bps to 30 bps on an average between the first estimate and the third estimate. That means, the eventual GDP growth would still be substantially higher than the previous estimate by Atlanta Fed. Now, what happens to the Fed estimate. Fed had upgraded the full year GDP growth for 2023 from 1.0% to 2.0% in September and again from 2.0% to 2.6% in December. We have to wait till March for the next update, but the estimate of 2.6% was based on 2.0% GDP growth estimate for Q4. Now that it is expected to be above 3% in Q4, the Fed may revise full year GDP also higher.

The other aspect is whether a hard landing has been avoided by the US economy. Contrary to the worst fears of the sceptics, it does appear like the US Fed may have achieved that elusive soft-landing of the US economy. That means; the Fed has managed to control inflation by persistently hiking rates without allowing growth to be hindered. There are still two risks to inflation and growth. Much of the growth in real GDP has come from lower inflation and it remains to be seen what happens once these benefits start to taper. Secondly, the crisis in the Red Sea looks like a ticking time bomb, at least as far as energy costs are concerned. These are the two risks that the Fed has to contend with.

BREAKING UP THE US GDP GROWTH STORY FOR Q4-2023

The real gross domestic product (GDP) for Q4-2023 increased at an annualized rate of 3.3% based on the FAE. While this is lower than the Q3 GDP growth of 4.9%, it is sharply higher than the Atlanta Fed projection of Q4 GDP in the range of 2.0% and 2.2%. We will get a clearer picture of the Q4 GDP, when the second estimate is out on February 28, 2024. Here are some key takeaways from the first advance estimate of Q4 US GDP.

• The increase in real GDP reflects a rise in consumer spending, higher exports, improve spending by state and local governments, non-residential fixed investment, federal government spending, private inventory investment, and residential fixed investment. This was offset by higher imports.

   

• The increase in consumer spending has been a mix of demand for services and goods. Under services, key contributions came from food services, accommodation, and health care. The leading contributors to the increase in goods were pharmaceutical products and recreational goods and vehicles. 

   

• Service and goods exports were robust during the quarter. The improved goods exports were triggered by petroleum products while financial services led the services story. The increase in state and local government spending reflected increases in compensation of state and local government employees and investment in structures. The higher outlays for non-residential fixed investment reflected increases in intellectual property products, and equipment. 

   

• What about the contribution of the Federal government in the US. The growth was led by non-defence spending. The spike in inventory investment was triggered by wholesale trade segments. Within imports, the increase reflected an increase in services (led by travel), and this had an offsetting impact on GDP growth.

   

• Compared to Q3-2023, the deceleration in real GDP in Q4-2023 (from 4.9% to 3.3%) is largely a reflection of slowdowns in private inventory investment, federal government spending, residential fixed investment, and consumer spending. 

   

• Let us look at some of the nominal numbers (gross of inflation adjustment). The nominal GDP increased by 4.8% ($328.7 billion in absolute accretion), in the fourth quarter to a level of $27.94 trillion, annualized GDP. This accretion is lower compared to the third quarter when the nominal GDP increased by 8.3% ($547.1 billion in absolute accretion).

The moral of the story is that GDP growth has been robust. While it has been lower than the third quarter, the relevant comparable is that the FAE is substantially higher than the Q4 estimates put out by the Atlanta Fed. That raises hopes of an upgrade to the Fed estimates of full year GDP by about 10 to 20 bps over its 2.6% full year target.

HOW PERSONAL INCOMES SHAPED UP IN Q4 AS PER FIRST ADVANCE ESTIMATE

Let us start with the current-dollar personal income (nominal terms), which saw an absolutely accretion of $224.8 billion in the fourth quarter, compared with an increase of $196.2 billion in the third quarter. This spike can be attributed to the increases in compensation, personal income receipts on assets, and proprietor income. However, these gains were 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 $211.7 billion (4.2%), as against an increase of $143.5 billion (2.9%) in the third quarter. Real disposable personal income net of the inflation effect, also increased 2.5% in the fourth quarter, compared with an increase of just about 0.3% in the third quarter of 2023.

The personal savings were slightly lower in Q4, as compared to Q3. For instance, the personal saving stood at $818.9 billion in Q4-2023 as compared to $851.2 billion in the third quarter. The personal saving rate (defined as personal saving as a share of disposable personal income) stood at 4.0% percent in the fourth quarter, lower than 4.2% in the previous quarter (Q3-2023). Clearly, the higher disposable income levels in the fourth quarter and inflation, appear to have impacted the savings rate in Q4.

EMERGING PICTURE OF FULL YEAR US GDP FOR 2023

How does the full year US GDP picture for 2023 look like based on the FAE data for Q4? Real GDP increased 2.5% for the calendar year 2023, on a yoy basis. This is much better than the growth of 1.9% recorded for calendar year 2022. What triggered the full year GDP growth for the year 2023? Here are some important takeaways.

• Growth in GDP in 2023 was triggered by increases in consumer spending, non-residential fixed investment, state and local government spending, exports, and federal government spending. This was offset by reduction in residential fixed investment and inventory investment. 

   

• The hike in consumer spending was largely triggered by an increase in services (mainly healthcare) and goods (mainly recreational goods and vehicles). The increase in state and local government spending reflected gross investment in structures and compensation for state and local government employees. Fed spending was higher for defence and non-defence items. 

   

• Nominal GDP, or current-dollar GDP, increased 6.3% in the year 2023 reflecting an absolute accretion of $1.61 trillion to a level of $27.36 trillion. This is sharply lower than the 9.1% growth achieved in 2022, but that was on the base of negative growth in the COVID year, so it is not entirely comparable.

   

• The good news is that PCE inflation as reflected by the index of private consumption expenditure, will be lower at 3.7% in the year 2023, compared to 6.8% in 2022. Even through the GDP growth may be lower yoy, the inflation hints are also lower. In addition, if you look at core PCE inflation (excluding food and energy), the PCE price index increased 4.1% in 2023, compared 5.2% in the year 2022.

While the full picture will only be out with the second and third estimates, it looks like the US economy may end up with better than expected Q4 GDP and lower expected inflation.

WILL THE GDP DATA IMPACT THE FED STANCE?

The latest GDP data will put the US government in a growth versus price stability dilemma. This is a dilemma, irrespective of how confident the central banks may appear. In recent weeks, there has been a distinct shift in the Fed stance. It is no longer about rate hikes, but about rate cuts; although the Fed has still abstained from giving any timeline for rate cuts. However, it has indicated 3 rate cuts of 75 bps in 2024 and 4 rate cuts of 100 bps in 2025. The decision gets harder for two reasons. The cut in rates will only give a further boost to GDP, which will be great news in an election year. However, it also means that higher growth could come at the cost of higher inflation. That is the dilemma that the Fed would now have to live with. Unfortunately, there are no simple answers here.

However, the Fed will celebrate the fact that hard landing fears are off the table for now, notwithstanding the risks of the Red  Sea crisis and the worsening relationships with China. The US yield curve has stopped indicating a possible reaction more than 3 months back. However, the pick-up in GDP growth also means that it is unlikely that inflation will fall sharply from these levels. Fed has to be mentally prepared for a long battle against prices.

HIGHER US GROWTH IS GOOD NEWS FOR INDIAN ECONOMY

There are 2 related implications for India from the updated US GDP estimates for Q4-2023. It needs no reiteration that, since February 2023 the RBI has explicitly preferred growth over inflation. RBI is 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. That allows the RBI to start seriously thinking of rate cuts this year.

The other big takeaway is that growth in the US is well and truly back. That has positive ramifications for Indian exports and for tech spending; both of which have been the casualties in the recent months. For the RBI, the risk of monetary divergence is still there; but it is reducing by the day. The latest Q4-GDP data from the US just indicates that the global growth engine may be actually extricating itself from 4 years of supply chain bottlenecks. That opens up multiple opportunities for India Inc.