US Q4 GDP growth final estimate pegged lower at 2.6%

5 Apr 2023 , 09:29 AM

On the last working day of March 2023, the US Bureau of Economic Analysis (BEA) released the third and final estimate of Q4 GDP as well as full year GDP for the calendar year 2022. In the US, the GDP typically goes through 3 estimates for each quarter. The first estimate for Q4 GDP had pegged the growth at 2.9% and in the second estimate this has been revised lower by 20 bps to 2.7%. Now, the final estimate of GDP has further lowered the real GDP estimate for the fourth quarter by 10 bps to 2.6%. This is in contrast to the third quarter when the second and third estimate had seen an upgrade to the Q3 GDP first advance estimate. This can be attributed to the pressure of higher core inflation, which we shall revert to later in this discussion.

US GDP story for Q4 and CY2022 in numbers

The QOQ real GDP for the US economy in the fourth quarter has fallen consistently from 2.9% in the first estimate to 2.7% in the second estimate and to 2.6% in the final estimate. One major reason appears to be the successively higher core inflation, which is indicative of supply chain pressures still elevated on a sequential basis.

Estimates of quarterly US Q4 GDP growth (QOQ)
Particulars	Advance (First)  Estimate	Second  Estimate	Final  Estimate
Real GDP	2.9%	2.7%	2.6%
Current Dollar GDP	6.5%	6.7%	6.6%
PCE Price Index	3.2%	3.7%	3.7%
PCE Price Index (ex-food, energy)	3.9%	4.3%	4.4%
Estimates of quarterly US Q4 GDP growth (YOY)
Particulars	Advance (First)  Estimate	Second  Estimate	Final  Estimate
Real GDP	1.0%	0.9%	0.9%
Current Dollar GDP	6.1%	6.2%	6.2%
PCE Price Index	5.5%	5.7%	5.7%
PCE Price Index (ex-food, energy)	4.7%	4.8%	4.8%
Estimates of Annual US 2022 GDP growth (YOY)
Particulars	Advance (First)  Estimate	Second  Estimate	Final  Estimate
Real GDP	2.1%	2.1%	2.1%
Current Dollar GDP	9.2%	9.2%	9.2%
PCE Price Index	6.2%	6.3%	6.3%
PCE Price Index (ex-food, energy)	5.0%	5.0%	5.0%

Data Source: US BEA

Here is a quick look at the key numbers across the three estimates of Q4 GDP.

1. On a QOQ sequential basis, the real GDP growth has been cut for the fourth quarter by 10 bps from 2.7% to 2.6%. That is a 30 bps cut since the first estimate. This has been largely triggered by lower consumption spending in the US. However, the YOY GDP estimate for the fourth quarter has been steady at 0.9%, same as the second estimate.

    

2. While overall inflation expectations have not changed since the second estimate of Q4 GDP, there has been a spike in the core inflation outlook. However, that has been offset by lower inflation expectations on food and fuel. In the second estimate, there was a substantial uptick of 50 bps in PCE inflation from 3.2% to 3.7%.

The third estimate has kept data points constant, except a small increase in core inflation estimate. That has had a 10 bps impact on the real GDP growth for the fourth quarter. 

What triggered QOQ GDP growth of 2.6% in Q4?

Unlike the Q3 GDP estimates for the US economy, where each subsequent estimate was higher, the Q4 GDP estimate has seen the estimates tapering in every subsequent estimate. This can be attributed to the heightened uncertainty in the US economy, higher than expected hawkishness of the central banks and an impact on the growth of select sectors like housing and financial services. This data is prior to the outbreak of the banking crisis in the US, led by SVB Bank. Hence, a clearer impact of the banking crisis would only be evident when the Q1 estimates for 2023 start coming out.

Let us turn to some of the key drivers of the 2.6% GDP estimate in Q4 ended December 2022. The real GDP growth of 2.6% on QOQ basis largely reflected higher private sector inventory investment, higher consumer spending, non-residential fixed investments, Federal and state government spending. However, this was largely offset by decrease in residential fixed investments and lower exports. The enhanced consumer spending can be attributed to higher spending on services than on goods. In fact, the spending on conspicuous consumption like jewellery was seriously dented in the fourth quarter amidst uncertainty.

What triggered full year real GDP growth of 2.1% in CY2022?

The annual growth estimates for CY2022 have been kept constant at 2.1% through the three estimates. That is sharply lower than the 5.9% real GDP growth reported in CY2021, but that was a year of extraordinary growth on an artificially lower base. To that extent, CY2022 reflects more of normalized growth. However, scratch the surface, and the big impact has come from higher inflation. For instance, the current dollar GDP for CY2022 saw an accretion of $2.15 trillion (9.2%) to $25.46 trillion. This compares fairly with the current dollar GDP growth of 10.7% in CY2021. So, the real challenge in CY2022 is higher inflation.

Even the CY2022 data shows a clear GDP preference for services, at the cost of goods. For instance, in 2022, private goods producing industries contracted -2.8% while private services producing industries grew 3.4%. That has been the standard template across the US economy in all the four quarters of 2022. Even within private goods, the pressure came largely from reduced construction activity. In private services, retail trade was lower, but that was more than offset by growth in professional, scientific, and technical services. The surge in government spending was largely led by the state governments and municipalities.

Will 2022 GDP final estimates impact Fed rate outlook?

There have been hints in the last few months that lower growth assumption and slowdown concerns could impel the Fed to go slow on rate hikes. The pressure is already evident in housing activity and consumption is sharply down. However, the Federal Open Markets Committee (FOMC) would still prefer to look at the robust labour data. Also, the Fed is likely to treat the latest data flow as affirmation that real growth is being pressured by core inflation. However, there are two scenarios that could play out.

• The first scenario is that the inflation impact is a lot quicker in the coming months. Once the path to 2% inflation is clear, the Fed may slow down on rate hikes and may even consider rate cuts in 2023, instead of 2024. At least, that is what the CME Fedwatch has been indicating in recent weeks.

   

• The new joker in the pack could be the banking crisis with the recent collapse of SVB Bank and Signature Bank. Higher rates have been assigned as a reason for their collapse, but that is just part of the truth. Fed has already stated that it would keep the rate hike decision and the banking crisis separate. However, that would only be possible till the time it does not snowball into a full-fledged crisis. We have to wait and watch!

Key takeaways for Indian economy from final US GDP estimates

The Fed has constantly harped that inflation  was the reason for low real GDP growth and they are right. Nominal growth in GDP for 2022 is at par with 2021, so controlling inflation is the answer. That is the approach that even the RBI has adopted and this only implies that the RBI may not give up on hawkishness too soon. For now, the RBI may target a higher terminal rate of above 7% and that is likely to have an impact on cost of funding. That has impacted the margins of Indian companies, but it is still a lesser evil than rampant inflation.