Third Estimate for US Q3-2023 GDP 30 bps lower at 4.9%

22 Dec 2023 , 09:17 AM

US Q3 GDP, Third Estimate tapers by 30 bps back to 4.92%

The third and final estimate for Q3 US GDP would have been normally announced in the last week. However, owing to Christmas and New Year holidays, the Fed has announced the third and final estimate of Q3 GDP on December 21, 2023 itself. As per the United States Bureau of Economic Analysis (BEA), the third and final estimate of Q3 GDP growth tapered by 30 bps to 4.9%. It may be recollected that when the US BEA announced the first estimate of Q3 GDP, it was robust at 4.9%. However, the second estimate upped it by 30 bps to 5.2%. Now the third and final estimate of Q3 GDP is back to the first estimate of 4.9%. While this is lower than the second estimate, it is still robust. However, the number was good enough for the Fed to raise its 2023 GDP growth forecast by full 50 basis points to 2.6%. 

Higher GDP Q3 estimate, raises Fed GDP projections

Every quarter, the Fed updates its estimates of key macro parameters like GDP, inflation, labour data and rate expectations. In the December policy statement, the Fed also presented macro estimates for next few years. While inflation estimates are down since the last update in September, what stands out is the upgrade to GDP growth for 2023. In the September update, the Fed had raised the 2023 GDP estimates by a full 100 basis points. It had been pegged at 1.1% in June, which was upgraded to 2.1% in the September estimates. Now, December 2023 update has upped GDP forecast for 2023 by another 50 basis points to 2.6%. In short, the GDP flow numbers have been so strong that in the last 2 quarters, the Fed has raised its GDP estimates for 2023 by a full 150 basis points. Of course, the GDP growth in subsequent years have not changed meaningfully, although it could still happen.

Are hard landing risks off the table for the US economy?

While the Atlanta Fed has lowered its Q4 estimates to around 2%, the actual GDP for 2023 would be much higher than what markets feared. The small banking collapse in early 2023 and the spike in inflation had led the Fed to conclude that it may struggle to prevent a hard landing of the US economy. Hard landing is a logical consequence of too much of inflation control. However, what Fed appears to have achieved in last one year is that inflation has come largely under control while GDP growth is still robust. In short, it is the opposite of the stagflation fears that inflation may end up being too high and GDP growth may be too low. 

The US Bureau of Economic Analysis (BEA) puts out 3 estimates for the GDP over 3 successive months; and this cycle goes on. The First Advance estimate for Q3-2023 was put out on October 26, 2023 at 4.9% and on November 29, 2023; the second estimate of Q3 GDP came in 30 bps higher at 5.2%. On December 21, 2023; the third and final estimate of Q3 GDP has come in at 4.9%. This may be lower than the second estimate but it is back at the already elevated level of the first estimate. One thing is clear that the GDP growth in Q3-2023 GDP growth is substantially higher than Q1 and Q2, and possibly than the estimated GDP growth for Q4 too. Based on this data, in the absence of negative surprises, one can safely conclude that fears of a hard landing look largely unfounded. 

Summing up the story of the 3 GDP estimates for Q3-2023

Here is a quick summary of the three estimates for US GDP for the third quarter of 2023 and the factors driving the shifts in the three estimates.

Macroeconomic Variables	Advance Estimate	Second Estimate	Third Estimate
(Percent change from preceding quarter)
Real GDP	4.9	5.2	4.9
Current-dollar GDP	8.5	8.9	8.3
Real GDI	…	1.5	1.5
Average of Real GDP and Real GDI	…	3.3	3.2
Gross domestic purchases price index	3.0	3.0	2.9
PCE price index	2.9	2.8	2.6
PCE price index excluding food and energy	2.4	2.3	2.0

 

Data Source: US Bureau of Economic Analysis (BEA)

Clearly, nominal GDP has taken a hit compared to the first and the second estimates. The good news is that the lower inflation estimate has resulted in partially neutralizing this lower nominal growth. As a result, real GDP growth estimate for the third quarter has been maintained at the first advance estimate levels of 4.9%. Let us now turn to some sectoral triggers for this shift in GDP estimates over the last 3 months of the Q3-2023 quarter.

• In the third and final estimates of Q3-2023 GDP growth, the downward revision of 30 bps saw pressure from consumer spending, private inventory investment, and exports of US goods and services abroad.

   

• However, this negative private consumption effect was partially offset by upward revisions to state and local government spending, non-residential fixed investment, residential fixed investment, and federal government spending. These ensured that the GDP growth in real terms stayed at par with the first estimates.

   

• How did the break up of GDP growth look between goods and services? Private goods-producing industries increased 10.2%, while the private services-producing industries increased a much lower 4.1%. In addition, the government contribution to GDP increased 2.0% during this period.

   

• Let us turn to the various industry groups and how they contributed to GDP growth in Q3. In all, 14 of the 22 industry groups contributed to the third-quarter increase in real GDP, while others contribute to weakness in GDP, although net effective was positive.

   

• Within the realm of private goods-producing industries, the key contributors to the increase were nondurable goods manufacturing segments like chemical products and construction. Among the private services-producing industries, the leading contributors to the increase in GDP were retail trade, information, as well as finance and insurance. Utilities was the one factor that neutralized the above increases to GDP.

   

• Finally, let us turn to government contribution to the GDP growth. The increase in government contribution reflected an increase in state and local government contribution. However, that partly offset by a decrease in federal government contribution to the GDP growth.

What the US economy has displayed in the third quarter (Q3-2023) is a resilient bounce in GDP and also the first indication that fears of hard landing may be finally off the table.

How the third estimate of Q3-2023 GDP differed from second estimate?

The GDP growth in Q3 is higher than Q2, by close to 300 basis points. What exactly triggered this acceleration in GDP in the third quarter? If you compare with the second quarter, the acceleration in real GDP in the third quarter (Q3-2023) is principally reflective of an upturn in exports and accelerations in consumer spending and private inventory investment. However, this was partially offset by deceleration in non-residential fixed investment. Imports were higher in the third quarter as compared to the second quarter of 2023. Private consumption has shown a distinct pick-up in the third quarter as the Federal Reserve has maintained status quo on rates in 4 out of the last 5 FOMC meetings.

Current‑dollar GDP or Nominal GDP as per the third estimate of Q3 GDP, showed an increase of 8.3% annualized of $547.1 billion in absolute terms to $27.61 trillion at the end of the third quarter. That is a downward revision of $34.3 billion compared to the second estimate of Q3-2023 GDP. The fall in nominal GDP was sharp, but the real GDP found a saviour in the form of lower inflation. The price index for gross domestic purchases increased 2.9% in the third quarter, a downward revision of 10 bps compared to the previous estimate. At the same time, the PCE inflation increased 2.6%, which marks a downward revision of 20 bps; triggered by a 30 bps fall in the core PCE inflation index. 

How personal incomes shaped up in Q3 as per third estimate

For the quarter ended September 2023, the current-dollar personal income increased by $196.2 billion in dollar terms; a downward revision of $22.1 billion compared to the second estimate of Q3-2023 GDP growth. 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 (third estimate), the disposable personal income (DPI) increased by $143.5 billion, or 2.9%. This is a marginal downward revision of $0.5 billion compared to the second advance estimate. Real disposable personal income (net of the inflation effect) increased by 0.3%, which is an upward revision by 20 basis points. A quick word on the personal savings rate too is warranted here.

In sync with the rise in the disposable income levels, even personal savings are higher in this quarter. For the September 2023 quarter (third estimates), the personal savings stood at $851.2 billion, an upward revision of $35.9 billion over the second advance estimate. If you look at the ratio of personal savings rate as a share of disposable personal income, stood at 4.2%, an upward revision of 20 bps compared to the second advance estimates.

How will the Fed react to the GDP Third Estimate of Q3-2023?

In recent weeks, there has been a distinct shift in the Fed stance. From talking about rate hikes, the Fed policy statement in December 2023 saw the discussing veering towards rate cuts. The Fed has now committed to enhance rate cuts in 2024 from two cuts to three cuts, with four additional rate cuts in 2025. In short, the Fed expects the rates to be lower by 175 basis points by the end of 2025. The CME Fedwatch expects this to happen much sooner, but we can avoid the market enthusiasm for now. Even if we assume that the Fed sticks to its target of 175 bps of rate cuts by end of 2025, that is a substantial amount of monetary easing and could just be the kind of impetus that the US markets would be looking at. 

The big takeaway for the Fed is that the hard landing fears are off the table for now. Soft landing is no longer a mirage, but looks a very likely scenario now. Also, the term structure of rates in the US are 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 unlikely that inflation will fall sharply from these levels. However, since the Fed has spoken confidently about rate cuts in the coming two years, it only shows that the Fed is mentally preparing itself for a new normal on interest rates, which is higher than past paradigms.

How would this US GDP data be interpreted by India?

There are 2 broad implications for India from the updated US GDP estimates for Q3-2023. Since February 2023, the RBI has emphatically preferred growth over inflation. RBI is keeping one eye on the extent of global hawkishness and the US economy; but the global hawkishness is reducing and US growth is back. That allows the RBI to start seriously thinking of rate cuts in the future.

The other big takeaway is that growth in the US is coming back. That has positive ramifications for Indian exports and for tech spending, which forms the basis for Indian services exports. For the RBI, the risk of monetary divergence is still there; but it is reducing. The latest GDP data from the US just indicates that the global growth engine may be finally getting over 4 years of supply chain overhang. That is the good news.