Third Estimate for the US Q1GDP improves 70 bps to 2.0%

30 Jun 2023 , 07:10 AM

Now, it must be understood that for each of the quarters, the US Bureau of Economic Analysis (BEA) releases three official estimates. These include the first advance estimates, the second estimates and the third estimates. 

For the first quarter Calendar 2023 ending March, the US BEA had released the first advance estimates in April at 1.1%, second estimate in May at 1.3% and now the third and final estimate for the March 2023 quarter announced in June 2023 has come in higher at 2.0%. That is nearly 70 bps more than the second estimate. 

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 then the first quarter of 2023 bore the brunt of the Fed hawkishness and the slowdown in several industries. We will take a more granular look at the numbers now.

First, the big picture of Q1-2023 GDP in the US

The table below captures the key data points across the three estimates for Q1-2023 on parameters like sequential real GDP growth, nominal GDP growth, prices etc.

US GDP GROWTH ESTIMATES FOR Q1-2023 (SEQUENTIAL %)
Particulars	Advance  Estimate (%)	Second  Estimate (%)	Third  Estimate (%)
Real GDP	1.1	1.3	2.0
Current-dollar GDP	5.1	5.4	6.1
Real GDI	…	-2.3	-1.8
Average of Real GDP and Real GDI	…	-0.5	0.1
Gross domestic purchases price index	3.8	3.8	3.8
PCE price index	4.2	4.2	4.1
PCE price index excluding food and energy	4.9	5.0	4.9

 

Let us first look at the big picture of the GDP story in the March 2023 quarter, based on the slightly upgraded Q1CY2023 third estimates. The 2.0% enhanced growth in real GDP (nominal GDP adjusted for inflation) can be largely explained by an increase in consumer spending, higher exports, rise in federal government spending, state, and local government spending, and as well as non-residential fixed investments. 

However, this was to an extent neutralized by growth restricting factors like decreases in private inventory investment and weak residential fixed investment. Imports were also higher during the quarter. Let us also look at the growth in current dollar terms. The current dollar GDP increased at 6.1% annually or $391.8 billion to a level of $26.53 trillion of GDP annualized. That is an upward revision of $43.5 billion from the second estimate, so most of the gains have come from higher nominal growth and not just from containing inflation.

How did personal incomes change in the quarter

There were some interesting takeaways on the personal income front. If you look at the current-dollar personal income, for the first quarter, it was up by $278.0 billion, which reflects a clear upward revision of $26.7 billion from the second estimate of May 2023. The increase is primarily reflective of the increases in compensation (led by private wages and salaries) and personal current transfer receipts (led by government social benefits). What about disposable incomes? 

The disposable personal income increased by 12.9% to $587.9 billion in the March 2023 quarter; which reflects an upward revision of $26.4 billion from the previous estimate of May 2023. Thanks to static to weak inflation data, even the real disposable personal income increased 8.5%; which is 70 bps better than second estimate. Even personal savings got a $11.6 billion boost in the quarter to $840.9 billion compared to the previous estimates of May 2023. The personal saving rate actually moved up from 4.2% to 4.3% between the second estimate and the third estimate.

How did corporate America perform in March 2023 quarter?

An important aspect of the GDP estimates put out by the BEA is the granular data on corporate profits. That has been under pressure in the last few quarters and that trend continued in the current quarter also. For instance, profits from current production (corporate profits with inventory valuation and capital consumption adjustments) actually fell by $121.5 billion in the first quarter, although it must be said that this is better than the previous estimate by at least $30 billion. 

Domestic financial companies in the US saw their profits fall by $9.4 billion in the first quarter. However, as per the second estimates, this fall was supposed to be more than $25 billion; so, it is relatively benign compared to the previous estimate.  On the other hand, the profits of US-based non-financial companies was lower by $102.9 billion, which is also about $6.5 billion better than the second estimate published in May 2023. Profits of American companies from the rest of the world decreased $9.2 billion. Overall, the numbers are still negative, but it not as bad as envisaged in the second estimate in May 2023.

In the third estimate, the BEA also released the data on estimates of real GDP by industry. This effectively measures how much value each sector adds to the overall real GDP of the US economy. For the first quarter ended March 2023, the value added of private services producing industries increased 2.6%, government increased 2.7%, while the private goods producing industries decreased 0.7%. Clearly, pressure is coming from private goods manufacturing, while others are holding up in the positive. In total, 15 out of the 22 industry groups contributed to increase in real GDP in the first quarter ended March 2023 as per the third and final estimates of GDP.

What were the specific private services that provided this boost? Within private services producing industries, the increase in GDP was led by healthcare, social assistance, retail trade, real estate, rental & leasing, accommodation, and food services. Even within the services, there was a decrease in output in the finance and insurance segments. On the other hand, the increase in government contribution reflected higher state and local as well as federal government contributions. The pressure came from private goods. Here there was a decrease in contribution from durable goods and nondurable goods manufacturing. However, positive signals came from increase in agriculture, forestry, fishing, and hunting.

What this data means for the Fed and for India?

Will this data impact the Fed rate move going ahead. Fed is already on pause mode in June and this may give them an incentive to not worry overly about the growth impact of rate hikes. Ironically, that may be an invitation to the hawks within the FOMC to persist with their targeted two more rate hikes and even try and front end it this year itself. 

In the latest minutes of the Fed, it has explicitly spoken about a possible recession from the third quarter of 2023, but most of the high frequency data has been on the positive side for now. With the Fed having paused in June and Jerome Powell still talking hawkish, this GDP data may induce the Fed to experiment with 25 bps rate hike in July policy. However, July may give a clear picture of the peak rates in the US.

What does this data mean for India? The RBI already appears to have charted the path but it is certainly keeping one eye on the extent of global hawkishness. RBI has held status quo in April and June and during the period; the Fed, ECB and Bank of England have continued their hawkish stance.

 For now, India will focus more on growth and allow inflation to control itself based on the lag effects of monetary tightening. But the RBI will keep an eye on the Fed rates and US GDP for 2 reasons. Firstly, to check for risks of monetary divergence. Secondly, the RBI and the Indian government would want to ensure that a global slowdown does not apply brakes on the Indian growth momentum.