Second Estimate of US Q4-2023 GDP almost flat at 3.2%

29 Feb 2024 , 09:16 AM

US Q4-2023 GDP SECOND ESTIMATE REMAINS ROBUST

The first advance estimate (FAE) of Q4-2023 GDP by the US Bureau of Economic Analysis (BEA) towards the end of January, had pegged Q4-GDP at 3.3%. In the second GDP estimate put out by the US BEA on February 28, 2024, the GDP estimate for Q4 is 10 bps lower at 3.2%, compared to the first advance estimate as this contains more comprehensive data. The last and final estimate of fourth quarter GDP, along with the full year GDP estimate for 2023 will be out in the last week of March 2024. It may be recollected that the GDP growth in the third quarter ended September 2023 was at a surprisingly robust 4.9%. 

Compared to the first estimate of Q4 GDP, the second estimate is 10 bps lower at 3.2% covering comprehensive data points. In fact, the downward revision in the second estimate reflects downward revision in private inventory which was partially offset by upward revisions to state and local government spending as well as to consumer spending. The table below captures the break-up of the 3.2% GDP growth for fourth quarter, juxtaposed with the recent six quarters.

GDP Data	Q3-2022  YOY (%)	Q4-2022  YOY (%)	Q1-2023  YOY (%)	Q2-2023  YOY (%)	Q3-2023  YOY (%)	Q4-2023  YOY (%) #
GDP Overall	2.7	2.6	2.2	2.1	4.9	3.2
GDP – Goods	7.9	6.2	-1.3	0.9	7.3	2.8
GDP-Services	2.5	2.5	3.2	1.9	2.9	2.7
Structures	-13.5	-9.6	8.9	7.7	10.0	8.5
Auto O/P	15.3	-1.2	14.7	15.4	-7.1	-21.9
GDP Ex-Auto	2.3	2.7	1.9	1.7	5.2	4.0
Non-farm GVA	2.8	2.8	1.8	2.0	5.8	3.5

Data Source: US Bureau of Economic Analysis (BEA) – # updated for second esimates

As can be seen in the above table, the GDP growth in goods and services has been positive, although the Goods GDP growth has tapered compared to the sharp spike in the third quarter. On the other hand, the services GDP growth has been largely stable in the range of 2.5% to 2.7%. If we look at the data, the pressure on GDP appears to have come from the negative growth in auto output and in farm output. That explains why the non-farm GVA is higher at 3.5%, while the GDP ex-auto is actually up 4.0% in the fourth quarter. In short, net of automobiles and motor vehicles, the US GDP has been growing at a very impressive rate.

TWO QUESTIONS: WHAT ABOUT HARD LANDING AND RATE CUTS?

There appears to be two key question that arise after the second estimate of fourth quarter GDP for the US economy continued to be robust, except for a marginal 10 bps downsizing. There is still one more estimate to come in the end of March, but let us address the first question on hard landing first. Even Fed governors in their speeches, of late, have admitted that the risk of hard landing may be finally out of the way. Based on the current estimates, the GDP for the full year could be closer to 2.5%-2.6%, which is substantially higher than where the estimates started off. Even the Atlanta Fed GDP estimates for Q1 of 2024 continues to be robust at around 3%, so even 2024 may surprise on the upside.

Will the robust growth induce the Fed to cut rates or would they prefer to wait and watch. In a recent speech, Christopher Waller said that there was no tearing hurry to cut rates in the light of such robust GDP growth numbers. The point is, when the going is good, what is the need to upset the applecart. Also, the Fed is apprehensive that the inflation monster may not have been fully reined in. After all, there is the evolving crisis in the Middle East and West Asia and it is in the Red Sea route that most of the oil risks are placed. Hence, the Fed would want to avoid a situation wherein the rate cuts give a fillip to inflation and the Fed is left without options. Rate cuts may actually have to wait for some more time.

BREAKING UP THE US GDP GROWTH STORY FOR Q4-2023

The second estimate of US Q4 GDP has pegged the GDP growth in the fourth quarter at 3.2%. That is 10 bps lower than the estimate in the first advance estimate of 3.3%. Of course, this could be more due to more comprehensive data points coming in, but here is a more granular look at the second GDP estimate for Q4-2023.

1. The increase in real GDP for Q4-2023 was revised lower by 10 bps in the second estimate from 3.3% in the FAE to 3.2% in the second advance estimate. This update is primarily a reflection of downward revision to private inventory investment. However, this was partially offset by upward revisions to state and local government spending. The other changes in the second estimate were that there was an upwards revision in consumer spending, residential fixed investment, and non-residential fixed investment. Even  the import figure was revised higher. 

    

2. Within the ambit of private inventory investment, the downward revision was led by retail trade, based on the updated and new Census Bureau inventory data. In addition, the revision to state and local government spending reflected an upward revision to structures investment, based on the revised census

    

3. Let us now turn to the revisions in consumer spending. Compared to the first advance estimate, there was an upward revision to consumer spending. This reflected an upward revision to spending on services that was partially neutralized by downward revision to spending on goods. Within the ambit of goods, the major contributor to the upward revision was healthcare. Within the ambit of goods, the principal contributor to the downward revision was recreational goods and vehicles; with the latter being under pressure for quite some time. 

    

4. Let us now turn to residential and non-residential fixed investments. Within the gamut of residential fixed investment, the contribution to upward revision was led by improvements, based on the new payroll data. Within the gamut of non-residential fixed investment, the upward revision reflected upward revisions to structures and other intellectual property products. This was, however, partially neutralized by downward revision to equipment.

    

5. Let us finally turn to the trade data. Within imports, both goods and services were revised up, based on updated data from International Transactions Accounts. Within the ambit of merchandise goods, the revision was led by industrial supplies and materials (specifically durable goods) and consumer goods (both durable and nondurable). In the gamut of services, the revision primarily reflected a revision to transport services.

To sum up, the downward revision in the second estimate, as compared to the first estimate has been just about marginal. One thing is that growth in GDP continues to be driven a lot more by services and less by physical goods.

HOW PERSONAL INCOMES SHAPED UP IN Q4 (SECOND ESTIMATE)

Let us start with the macro picture of current dollar GDP (nominal GDP), which increased by 4.9% or by $334.5 billion, in the fourth quarter to $27.94 trillion. This is an upward revision of $5.8 billion from the previous estimate at the end of the first quarter. Interestingly, if you compare the second estimate with the first advance estimate, then the nominal GDP is actually higher, but real GDP is lower and that is due to higher implicit inflation.

Let us now turn to the current-dollar personal income (nominal terms), which saw an absolutely accretion of $219.5 billion in the fourth quarter, with is an upward revision of $5.4 billion from the first advance estimate. The increase essentially reflects increase in compensation, personal income receipts on asserts, and proprietor’s income. However, this as partially offset by decrease in personal current transfer receipts.

Let us now move to a picture of the surpluses as depicted by the disposable personal income (DPI). For Q4, the DPI increased by $202.5 billion (4.0%). That is a downward revision of $9.2 billion compared to the first advance estimate. Real disposable personal income net of the inflation effect, also increased 2.2% in the fourth quarter, which is a downward revision of 30 bps compared to the first advance estimate.

The personal savings were slightly lower in the second estimate, compared to the first estimate. For instance, the personal saving stood at $809.2 billion in Q4-2023, which is a downward revision of $22.4 billion compared to the first advance estimates. The personal saving rate (defined as personal saving as a share of disposable personal income) stood at 3.9% percent in the fourth quarter, which is 10 bps lower than the first advance estimate. It looks inflation is playing spoilsport impacting the real GDP growth on one hand and also impacting the disposable income by putting less money in the hands of the people.

HOW SECOND ESTIMATE IMPACTS FULL YEAR 2023 US GDP 

The broad picture for 2023 ahs been that the fourth quarter has seen the nominal GDP to be higher than the first estimate. However, the real GDP is lower by 10 bps due to the impact of inflation. We will get a clearer picture when the PCE inflation for January 2024 is announced on the last working day of February. Here are some key takeaways.

• The real GDP growth for full year 2023 has not been impacted by the 10 bps downward revision in the second estimate. The Real GDP growth stays at 2.5%, the same level we saw in the first estimate of full year GDP. This is sharply higher than the 1.9% increase in 2022 compared to the previous year. The 2.5% growth in full year GDP for 2023 can be largely attributed to increases in consumer spending, non-residential fixed investment, state and local government spending, exports, and federal government spending. However, this was partially neutralized by decreases in residential fixed investment and private inventory investment. The imports also saw a fall, which was positive.

   

• The nominal GDP or the current-dollar GDP for 2023 full year increased by 6.3% yoy or by $1.61 trillion in absolute terms to the level of $27.36 trillion in full year GDP. The 6.3% nominal GDP growth in 2023 is lower than the 9.1% nominal GDP growth recorded in the year 2022. For the full year, 2023 saw gains from lower price levels. For instance, the gross domestic purchases increased 3.4% in 2023, compared with an increase of 6.8% in 2022. However, the  PCE inflation for 2023 full year increased just 3.7%, as compared to 6.5% in 2022. This fall in PCE inflation was triggered by core PCE inflation falling from 5.2% in the year 2022 to 4.1% in the year 2023.

The moral of the 2023 story is that the only big structural difference we can see is that inflation is meaningfully lower and the core inflation is also meaningfully lower. That has helped the real GDP growth to stay robust.

INDIAN POLICYMAKERS HAVE REASONS TO BE PLEASED WITH US GDP DATA

India would be looking less at the real GDP data and more at the nominal GDP data, which has actually increased in the second estimate as compared to the second estimate. India would not be too concerned about the higher inflation implication in the second estimate, since it is largely driven by the temporary hurdles caused by the Red Sea crisis. Things should normalize once the situation is under control or world trade manages to find another route that is viable and meaningful. RBI is keeping one eye on the extent of global hawkishness and the US economy. However, it does look like the penchant for global hawkishness is reducing and US growth is back on track. That allows the RBI to start seriously thinking of rate cuts this year; although it could happen only in H2-2024.

US growth also has positive ramifications for Indian exports and for tech spending; both of which have taken a hit in recent months. Monetary divergence risk appears to be off the table for now. The second estimate of Q4-GDP data from the US indicates that, even as EU and Japan may be struggling with growth, the US growth engine is still revving.