iifl-logo-icon 1

Invest wise with Expert advice

By continuing, I accept the T&C and agree to receive communication on Whatsapp

sidebar image

US Q3 GDP grows at a healthy and upgraded 3.2%

23 Dec 2022 , 12:20 PM

For the third quarter ended September 2022 the US GDP growth had been pegged at 2.6% in the first estimate and at 29% in the second estimate. The third and final estimate of Q3 GDP released on 22nd December has pegged Q3-2022 GDP growth at a healthy clip of 3.2% per the latest estimates put out by the US Bureau of Economic Analysis (BEA). This is significant coming after 2 consecutive quarters of GDP contraction. US GDP had contracted by -1.6% in the March 2022 quarter and at the rate of -0.6% yoy in the June quarter. The latest bounce in Q3, not only signals positive momentum, but also demolishes the recession allegations on the US economy.

When the GDP growth of the US economy had contracted in the first two quarters of 2022,it had raised serious questions over whether the aggressive hawkishness of the Fed had resulted in serious damage to the US growth engine. Even at that time, the US had maintained that the negative GDP growth was an outcome of high inflation and not of weak nominal growth. that argument appears to be ratified for now.

Real GDP growth in Q3 by industry groups

The third and final estimate for the third quarter GDP has also included the estimates of GDP by industry, giving a picture of which sectors were having a positive impact on GDP and which sectors were having a negative impact. Out of the 22 industry groups, 16 were in the positive while 6 industry groups were in the negative. Here are some key takeaways from the industry wise classification of US Q3 GDP growth.

  1. Private services grew by 4.9% during the quarter while government driven GDP increased by 0.6%. The negative contribution came from the private sector goods manufacturing, which contracted by 1.3% on a yoy basis.

     

  2. Within the private sector services industry, the biggest contributors to GDP growth were the information segment, professional services, scientific services, technical services, as well as real estate, rental and leasing. In the services space, the contraction was seen in utilities, finance and insurance services. 

     

  3. The increase in government contribution was led by an increased contribution of state and local governments even as there was a decrease in the contribution of the Federal government. In terms of private sector goods production, the sharp fall was led by construction while that offset partially by an increase in mining.

Back to basics; what were key drivers of US GDP in Q3

What were the major contributors to the +3.2% GDP growth in the third quarter. It must be kept in mind that the first estimate of Q3GDP had pegged the growth at 2.6%, which was later raised to 2.9% in the second estimate and now to 3.2% in the third and final estimate. The graph below captures the drivers of the 3.2% GDP growth in Q3.

A quick view of the chart is that trade and consumer spending continues to be the big drivers of US GDP growth while housing and tepid business investments in inventories were dragging GDP down. Here are some key takeaways.

  • Exports had a positive contribution to the real GDP growth in the third quarter. For instance, the increase in exports reflected both goods (led by industrial supplies and materials, non-automotive capital goods and business and travel services.

     

  • Another related contribution to the GDP growth in the third quarter came from reduced imports. In fact, the fall in imports in the quarter reflected decrease in goods (led by consumer goods) and services (led by transport). It was partially the slowdown effect.

     

  • The increase in consumer spending was led by services rather than by physical goods. There was an increase in the contribution of healthcare and other services but this enthusiasm was partly offset by a decrease in motor vehicles, food and beverages as well as other miscellaneous goods.

     

  • How do we interpret the increase in business investment. It broadly reflects the increases in equipment and intellectual property products. However, this was again partially offset by a decrease in structures.

     

  • The decrease in housing investment was led by a sharp fall in the new single-family housing construction. At the same time, the fall in private inventory investment was led by reduced demand from clothing retail and general merchandise retail. 

Overall, the narrative is the same. Private consumption continues to soar in services but housing and construction activity continue to be hit the most by hawkishness. Demand for consumer goods has also been tepid.

What does the GDP reading tell us about rates trajectory?

The US Fed appears to believe that higher rates is conductive to growth rather than being antithetical to growth. In a sense they are correct, in that the hawkishness has brought down inflation and in the process it has improved the real GDP growth. After hiking the rates by 75 bps on 4 occasions, the Fed tapered its rate hike to 50 bps in December. The Fed rates were already in the range of 3.75% to 4.00% prior to the December policy. With Fed hiking rates by 50 bps in December, the rates are already at the range of 4.25% to 4.50%. 

That is a full 200 bps above the neutral rate, so the lag effect on inflation should continue. Also, in its December meeting, the Fed statement hinted at another 75 bps of rate hikes at the bare minimum, which should take Fed rates to the range of 5.00% to 5.25%. That corresponds with the Fed terminal rate target of 5.1%. In short, notwithstanding the good growth numbers the Fed is not yet done with its rate hikes. There is at least 3 more rate hikes of 25 bps each to come. That is unless the growth situation gets really bad, which case, the Fed may have to shift its narrative rapidly from inflation to growth.

Does the GDP data come as Manna from Heaven

That may be too optimistic, but the positives in the growth data cannot be missed.

  • It is not often that you get to see 3 consecutive upgrades of the same quarter growth data. For the third quarter, the GDP data has been upgraded from 2.6% to 2.9% and later to 3.2%. The positive momentum is likely to be growth accretive to the US economy and the spill-over effects should be positive for countries like India.

     

  • Contrary to what the sceptics may believe, the Fed may have just about managed to secure a soft landing. The good news is that after a full year of hawkishness, the Fed has been able to report positive GDP growth in the third quarter with favourable momentum. For now, it indicates that a hard landing can still be avoided.

     

  • In India, the RBI has also toned down its hawkishness while refusing to relent on the battle against inflation. Indian economy has shown a lot of resilience amidst the headwinds with the promise of growing at 6.8% for FY23. If that works, India too may have avoided a hard landing.

The Q3 US GDP data with 3 upgrades has surely come as manna from heaven for the US markets as well as the Indian markets. It shows that hawkish policy need not be inconsistent with growth triggers. For now, that is the good news!

 

Related Tags

  • The US Bureau of Economic Analysis
  • US GDP
  • US GDP Q3
  • US Q3 GDP
sidebar mobile

BLOGS AND PERSONAL FINANCE

Read More

Invest Right News

BSE: Firing on all cylinders
10 Apr 2024|12:07 PM
Read More
Knowledge Centerplus
Logo

Logo IIFL Customer Care Number
(Gold/NCD/NBFC/Insurance/NPS)
1860-267-3000 / 7039-050-000

Logo IIFL Securities Support WhatsApp Number
+91 9892691696

Download The App Now

appapp
Knowledge Centerplus

Follow us on

facebooktwitterrssyoutubeinstagramlinkedin

2024, IIFL Securities Ltd. All Rights Reserved

ATTENTION INVESTORS
  • Prevent Unauthorized Transactions in your demat / trading account Update your Mobile Number/ email Id with your stock broker / Depository Participant. Receive information of your transactions directly from Exchanges on your mobile / email at the end of day and alerts on your registered mobile for all debits and other important transactions in your demat account directly from NSDL/ CDSL on the same day." - Issued in the interest of investors.
  • KYC is one time exercise while dealing in securities markets - once KYC is done through a SEBI registered intermediary (broker, DP, Mutual Fund etc.), you need not undergo the same process again when you approach another intermediary.
  • No need to issue cheques by investors while subscribing to IPO. Just write the bank account number and sign in the application form to authorise your bank to make payment in case of allotment. No worries for refund as the money remains in investor's account."

www.indiainfoline.com is part of the IIFL Group, a leading financial services player and a diversified NBFC. The site provides comprehensive and real time information on Indian corporates, sectors, financial markets and economy. On the site we feature industry and political leaders, entrepreneurs, and trend setters. The research, personal finance and market tutorial sections are widely followed by students, academia, corporates and investors among others.

RISK DISCLOSURE ON DERIVATIVES
  • 9 out of 10 individual traders in equity Futures and Options Segment, incurred net losses.
  • On an average, loss makers registered net trading loss close to Rs. 50,000.
  • Over and above the net trading losses incurred, loss makers expended an additional 28% of net trading losses as transaction costs.
  • Those making net trading profits, incurred between 15% to 50% of such profits as transaction cost.
Copyright © IIFL Securities Ltd. All rights Reserved.

Stock Broker SEBI Regn. No: INZ000164132, PMS SEBI Regn. No: INP000002213,IA SEBI Regn. No: INA000000623, SEBI RA Regn. No: INH000000248

plus
We are ISO 27001:2013 Certified.

This Certificate Demonstrates That IIFL As An Organization Has Defined And Put In Place Best-Practice Information Security Processes.