US Q4 GDP growth advance estimates pegged at 2.9%

30 Jan 2023 , 09:20 AM

For the fourth quarter ended December 2022, the advance estimates for Q4CY22 came in slightly lower at 2.9%. However, this is only the advance estimate. The BEA will put out the second estimate on 23rd February 2023 and the third and final estimate on 30th March 2023. In the third quarter ended September 2023, the advance estimates had pegged GDP growth at 2.6%. This was upgraded to 2.9% in the second estimate and to 3.2% in the third estimate. So, the Q4 GDP data in the US could have further upsides from here on.

The first estimate for Q4CY22 US GDP growth at 2.9% is 30 bps lower than the third quarter. However, there could be positive revisions, as we have seen in the previous quarters. September 2022 had seen a turnaround in GDP to positive growth after 2 quarters of negative growth. US GDP had contracted by -1.6% in the March 2022 quarter and by -0.6% yoy in the June 2022 quarter. For the full calendar year 2022, the US GDP is estimated to have grown by 2.1% as compared to 5.9% in 2021. However, 2021 was on a much lower base in the aftermath of COVID and supported by revenge buying.

Macroeconomic experts are of the view that going ahead things could get worse for the US economy. The combination of rate hikes by the Fed and constriction of housing demand is likely to restrain real GDP growth in the coming quarters. In a way, that is what the Fed wants. The lag effect of rate hikes on demand is not fully visible due to very low rates of unemployment in the US. They expect the US GDP growth to disappoint in year 2023.

What triggered 2.9% real GDP growth in Q4?

The first estimate of the GDP does not contain he industry-wise break up of GDP as that is only made available along with final estimates of GDP. Let us quickly look at what is it that triggered relatively healthy growth in the fourth quarter of CY22.

1. The real GDP growth in Q4CY22 was largely driven by private inventory investments (in anticipation of a turnaround in business). Additionally, consumer spending and federal spending were also higher. However, not all was hunky dory in Q4CY22. The GDP growth came under pressure from weak residential investments and weak exports.

    

2. The inventory accretion came predominantly from petroleum, coal, chemicals, mining, utilities and construction activity. The consumer spending was robust across goods and services. Healthcare, personal care and utilities were among the services that saw positive traction. Motor vehicles led the surge in consumer spending on goods. In case of government spending, it was not about defence but state and local spending. 

    

3. There were several pressure points too, which curtailed growth from reaching a higher plane. The pressure was visible in exports and residential investments. Imports were lower in the quarter and that actually led to positive impact on GDP.

CY2022 Q4 GDP story is broadly same as Q3

What were the major contributors to the +2.9% GDP growth in the fourth quarter. It must be kept in mind that this is the first estimate of Q4GDP, and there are two more estimates to come in. It is very likely that, like in Q3CY22, the GDP could get revised further in later estimates.

Like in the previous quarter, the GDP traction has been led by consumer spending, government outlays and business inventory build-up. Here are some key takeaways.

• The big contribution to the positive GDP in the fourth quarter comes from business inventory accumulation and consumer spending. The high level of consumer spending, despite higher inflation, is largely due to higher wagers and low levels unemployment levels. At 3.5%, the rate hikes are not getting transmitted into spending cuts.

   

• Another related contribution to the GDP growth in the fourth quarter came from reduced imports. 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. But this was also partially offset by the impact of lower exports in the quarter.

   

• Housing investments have been the big casualty putting substantial pressure on GDP numbers. That was expected, as rate hikes first impact the consumer mortgage investments and consumer spending falls only with a lag. The fall in housing demand is largely led by new single family construction and broker commissions.

Overall, the narrative is the same. Private consumption continues to soar in services but housing activity is hit by Fed hawkishness. However, there is a hint of business optimism in the way the inventory build-up is happening.

Inflation story; Real GDP versus nominal GDP

Over the last few quarters, the US government consistently denied any slowdown in the US economy, underlining that pressure on real growth came from high inflation. This argument is borne out by data coming in. The PCE price index (Fed benchmark for inflation) has gone up to 6.2% in CY22 compared to just 4.0% in CY21. To get a clearer picture of this inflation impact, one must look at comparative data of real growth and nominal GDP growth. 

Let us start with real GDP growth for CY22. At 2.1% in CY22 (based on Q4 first estimates), real GDP growth is sharply lower than 5.9% reported in CY21. Intuitively, CY2021 numbers may have bounced amid COVID recovery. That is part of the picture. The real answer lies in the nominal GDP growth. In CY22, nominal GDP grew 9.2% yoy to $25.46 trillion. However, the nominal GDP growth in CY21 was 10.7%. Also, the rupee accretion in nominal GDP in both the years was almost the same, highlighting that the GDP deflator or the inflation number had actually put pressure on the US economy real GDP numbers for CY22.

How will this GDP data impact the Fed rate stance?

Prima facie, the Fed has reasons to be optimistic in the light of growth bouncing back. However, it would only mean that the Fed would not relent on another 75 bps rate hike this year, possibly in 3 tranches of 25 bps each. Here are some takeaways.

• This is the first GDP estimate for Q4CY22 at 2.9% and this is higher than the first estimate of real GDP growth for Q3CY22. While economists have flagged concerns that a hard landing could impact growth, the expected fall in growth is not too sharp.

   

• What the Fed would really be watching for is the jobs data. In 2021 and 2022, the US economy added 11 million jobs in aggregate, pushing unemployment rate down to multi-year lows of 3.5%. This resulted in purchasing power remaining robust and even diluted the impact of rate hikes on inflation. Fed may persist longer than anticipated.

   

• With inflation only reacting spasmodically in the US and still about 350 bps from the target rate of 2.5%, Fed is likely to carry on with rate hikes and even combine it with monetary tightness. Hawkishness remains the name of the game for now.

For now, the bet is that Q1 and Q2 CY23 GDP numbers should distinctly slow down. If that does not happen, it could pose a different set of policy problems for the Fed.