Second Estimate for US Q3-2023 GDP 30 bps better at 5.2%

30 Nov 2023 , 01:07 PM

US Q3 GDP, second estimate improves by 30 bps to 5.2%

On 29th November 2023, when the United States Bureau of Economic Analysis (BEA) announced the second advance estimates for US GDP for the September quarter (Q3-2023). The US had already surprised the markets with 4.9% GDP growth shown in the first advance estimate. However, the second estimate put out has improved on that by another 30 bps at 5.2%. This is much better than the street expectation. The street was expecting that Q3 GDP second estimate would either stay at 4.9% or may be pegged lower due to more data points coming. However, the data surprised the street at 5.2%. This is just an advance estimate of Q3 GDP and actual numbers are yet to come in, but this should be largely reflective.

For Q3-2023, there will be the final estimate that will be issued at the end of December. However, the message is clear. The Q3 US GDP is going to be sharply higher than Q2 GDP, although the street still believes that the fourth quarter will see a sharp slowdown in GDP growth. 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. Looking at the Q3 data, it looks like the actual GDP growth for 2023 overall could actually be much higher. The big question is whether such robust cues will translate into Fed hawkishness? Will this result in more rate hikes by the US Fed? That would be a separate debate altogether.

It looks like soft landing for the US economy is for real

After the GDP growth for Q1 and Q2 averaged around 2.1%, the GDP growth for Q3 first surged to 4.9% in the first advance estimate and the second estimate has turned more optimistic at 5.2%. The Atlanta Fed had already hinted higher growth in Q3 2023 but this 4.9% growth is above the most optimistic estimates. However, it must be noted here that the same Atlanta Fed has pegged fourth quarter real GDP growth at just about 2%, so the euphoria of Q3 is unlikely to last in the fourth quarter. 

The US Bureau of Economic Analysis (BEA) puts out 3 estimates for the GDP over 3 successive months. The First Advance estimate for Q3-2023 was put out on 26th October at 4.9% and today the second estimate of Q3 GDP has been upgraded by 30 bps to 5.2%. Now, 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 looks strong, so the final GDP figure may not fluctuate out of this range of 4.9% to 5.2%. Anyways, it looks like the Q3-2023 GDP growth would be substantially higher than Q1 and Q2. One positive rub-off is that the fears of a hard landing may be finally laid to rest. It looks like soft landing is the name of the game and the US may not have to worry about negative macro surprises. 

Why did Q3-2023 GDP get upgraded by 30 bps?

Real GDP increased at an annual rate of 5.2% (1.3% at a quarterly rate) in the third quarter as per the second estimate. This compares with 2.1% (0.5% at a quarterly rate) in the second quarter. That is 30 bps higher than the first advance estimate of Q3 growth at 4.9%. The GDP upgrade by 30 bps as per the second estimate was triggered by consumer spending, private inventory investment, and exports. Imports, which are a subtraction in the calculation of GDP, increased and partially offset the advantage. Here are the highlights.

• The growth in US Q3-2023 GDP growth yoy was revised 30 bps from 4.9% to 5.2%. This primarily reflects upward revisions in non-residential fixed investment, state and local government spending, residential fixed investment, and private inventory investment.

   

• Now for the specifics. The revision to non-residential fixed investment reflected upward revision to structures, led by commercial and health care (mainly warehouses). The revision to state and local government spending primarily reflected an upward revision to structures investment. The revision to residential fixed investment reflected upward revisions to single-family structures.

   

• Within the ambit of private inventory investment, upward revision was triggered by wholesale trade industries (led by machinery equipment). The revision to consumer spending reflected downward revisions to spending for both services and goods.

   

• In the realm of services, the largest contributors were financial services and insurance. In the realm of merchandise goods, the largest contributor was motor vehicles and parts (led by used light trucks)

   

• Within imports, the downward revision was on account of services imports, specifically transport and travel. In addition, the real final sales to private domestic purchasers, which measures private demand in the domestic economy was up 3.3% in the quarter. 

 

Nominal GDP growth in the third quarter

The nominal GDP or the current dollar GDP shows the GDP growth prior to being adjusted for inflation. The real GDP is influenced positive by two factors. It gains from higher nominal GDP growth (growth in macro top line), but it also benefits from a fall in inflation. As we shall see, the September 2023 quarter saw the goldilocks effect play out in the US economy as GDP growth came in higher than expected while the inflation came in lower than was expected. For the third quarter ended September 2023 (based on second estimates), the current dollar GDP rose by 8.9% (8.5% as per first estimates), or you can call it a dollar accretion of $581.40 billion. This takes overall nominal GDP to a level of $27.64 trillion. This is higher than the first estimate of the third quarter and substantially higher than the final GDP estimate for the second quarter of 2023. 

Price index for gross domestic purchases is a measure of how the inflation impact has impacted the real growth. While the PCE inflation estimates have remained the same as the first estimate, the core PCE inflation has tapered by 10 basis points over the first estimate of GDP growth. The price index for gross domestic purchases increased 3.0% in the September quarter compared to just 1.4% in the second quarter. However, the estimate was the same as the first advance estimate. For Q3, the PCE price index rose by 2.8% (compared to 2.5% in Q2 and 2.9% in the first estimate). There is also good news on the core PCE price index front. The core price index (net of food and energy) rose 2.3% in Q3 as compared to 3.7% in Q2, and also hinting at a 10 bps downward revision to the first estimate.

How personal incomes shaped up in Q3 as per second estimate

For the quarter ended September 2023, the current-dollar personal income increased by $218.3 billion in dollar terms; an upward revision of $18.8 billion compared to the first advance estimate. Personal income receipts in the quarter were positively impacted by rise in compensation, non-farm proprietor income, and personal interest 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.

For the September 2023 quarter (second estimate), the disposable personal income (DPI) increased by $144.0 billion, or 2.9%. This is sharply higher by $48.2 billion compared to the first advance estimate. Real disposable personal income (net of the inflation effect) increased by 0.1%, which is an upward revision by 110 basis points. 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 (second estimates), the personal savings stood at $815.4 billion, an upward revision of $51 billion over the first advance estimate. If you look at the ratio of personal savings rate as a share of disposable personal income, stood at 4.0%, an upward revision of 20 bps compared to the first advance estimates.

Will the Fed use the GDP data for more rate hikes?

The Fed stance is typically a combination of 3 things. There is the Fed statement that is issued after every Fed policy conducted once in 45 days. Then there are the minutes of the Fed meeting, that is published 21 days after the Fed meeting is conducted. Thirdly, there is the speeches given by the Fed chair and other members, which serve as key inputs on the monetary front. For now, that stance is still veering towards hawkishness. While Fed has stated quite categorically that is not done with rate hikes, there is little justification to hike rates at this juncture. For now, the Fed has been following the policy of wait and watch and prefers to hold rates at higher levels for a longer period of time. The trade-off between growth and inflation is currently favouring the Fed holding rates, which is what they are doing. Hence, any major change in stance looks unlikely at this juncture. 

The key message that emanates from the latest GDP numbers for Q3 is that the soft landing is no longer a mirage, but looks a very likely scenario now. For now, the fears of hard landing and a slowdown in the growth look like remote possibilities. The indications are also coming from the US bond markets where the yields had spiked sharply about a month ago since the term structure of rates was getting rectified. That is an indication that the fear of recession indicated by a negative yield curve is no longer there. With GDP growth picking up, it is very unlikely that inflation will fall sharply from these levels. At best, inflation may stabilize at these levels, so the 2% target will still be a distant dream for the Fed. While Jerome Powell and team will not be in a hurry to hike rates, even the probability of aggressive rate cuts look remove. After all, the US economy appears to be in fine fettle, despite a 550 bps hike in the Fed rates since March 2022. 

While the FOMC members are still divided about future trajectory of rates and the concept of neutral and terminal rates, the sharp growth in GDP presents a new dimension to the entire story. As per Atlanta Fed, the high GDP of Q3 may be more of an exception than the rule. However, even if growth remains above the 2.1% average for 2023, then the inflation and consumer spending are unlikely to come down in a hurry. However, with growth spiking to 5.2% in Q3 as per second estimates, the Fed may look to front-end at least one rate hike.

How would this US GDP data impact India?

What does this data mean for RBI policy; and will it impact at all? In February 2023, the RBI had emphatically voted in favour of growth over inflation. That has remained the guiding policy over the last 8 months. RBI is certainly keeping one eye on the extent of global hawkishness and the US economy is already in the midst of an extended pause on rates. RBI has indirectly and tacitly ruled out rate cuts in the foreseeable future. The December 2023 monetary policy will be critical from that perspective.

One positive takeaway for India has been the sharp fall in consumer inflation from 7.2% to 4.9% over last 3 months. The RBI has some cushion to work with. However, median inflation is well above the RBI target of 2% long term inflation. The robust GDP growth in the US could mean better export demand and higher tech spending; both of which are positive for the Indian economy. For the RBI, the risk of monetary divergence is still there. Whether the RBI decides to go for a rate hike immediately or wait for longer, remains to be seen; but it may keep the window open for one more rate hike. The central banks of the US and of India have been maintaining an eerie silence for long. The Third and final estimate of GDP growth for Q3 and the India Q2 GDP numbers would be crucial in this context.