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Second Estimate for the US Q1GDP improves to 1.3%

27 May 2023 , 08:55 AM

For each of the quarters, the US Bureau of Economic Analysis (BEA) releases three official estimates. These include the first advance estimates, the second estimates and the final estimates. For the first quarter Calendar 2023 ending March, the US BEA had released the first advance estimates in April at 1.1%. However, the second estimate for Q1GDP has been upgraded by 20 basis points from 1.1% to 1.3%. While this is an improvement in GDP estimates on a relative basis, it is still too low in absolute terms, especially when you consider the 2.6% growth in GDP in the fourth quarter of 2022.

Let us begin with the big picture of Q1CY2023 GDP in the US

Let us first look at the big picture of the GDP story in the March 2023 quarter, based on the slightly upgraded Q2CY2023 estimates. The 1.3% enhanced growth in real GDP (nominal GDP adjusted for inflation) can be largely explained by an increase in consumer spending, higher exports, rise in federal government spending, state, and local government spending, and as well as non-residential investments in fixed assets. However, this was to an extent neutralized by growth reducing factors like lower private inventory investment and weak residential fixed investment as well as higher imports in the quarter. To explain this 1.3% growth in GDP in absolute terms, the US real GDP has been upgraded to $27.49 trillion in the Q1CY2023 second estimates, compared to $26.47 trillion in the first estimates for the quarter. Between the two estimates, the GDP accretion is $20 billion in absolute terms.

Inflation is impacting real GDP growth, but to a lesser extent

Let us first look at the current-dollar GDP or the nominal GDP. That increased 5.4% and added $348.3 billion ($328 billion as for first advance estimate) to the nominal GDP pool. That means, absolute growth is still there. Of course, this is lower than the fourth quarter nominal GDP growth of 6.6% or $414 billion in absolute GDP accretion; but 5.4% GDP growth is still a very robust number. But the real issue was on the inflation front. For instance, the price index for gross domestic purchases increased 3.8% in the first quarter, compared with an increase of just 3.6% in the fourth quarter of 2022. The personal consumption expenditure (PCE) price index increased 4.2% in the first quarter of 2023 as compared to just 3.7% in the fourth quarter. Even if you consider core PCE, it was up 5.0% (4.9% in Q1CY2022 first advance estimate) versus 4.4% in Q4CY2022.

Why is real GDP growth in Q1 perceptibly lower?

What explains the deceleration of GDP growth in the first quarter for the US economy? Apart from inflation, there is also a slowdown visible in select aspects of the economy. 

  1. Consumer spending continues to be higher at 3.8% in Q1CY2023. While spending on durable good showed a sharp spike of 16.4%, non-durable spending was almost flat at 0.9% while services spending was up 2.5%. Within durable goods, the major contributor  to consumer spending was motor vehicles and parts. On the other hand, under the services category, the increase was led by household consumption.

     

  2. Let us now turn to the trade aspect with growth seen in exports (which is positive) and also in imports (which is negative). If you break up the exports, there was an increase in the export of goods. Consumer good exports (except food and automotive) saw an export boost in the quarter. However, that was offset by a decrease in exports of services; like transport.

     

  3. Government spending was another factor that was responsible for the growth in GDP during the quarter. For example, the increase in Federal government spending was led by non-defence spending. On the other hand, the increase in spending by the state and local governments was primarily led by increase in compensation of employees.

     

  4. Residential fixed investment continues to be a pressure point. The major contributor continues to be the decrease in new single-family construction. However, rentals have been  higher and rent affordability has been falling in the US economy.

To sum it up, the upgrade to GDP estimates for Q1CY22 by 20 bps has been led by a boost to current dollar GDP or nominal GDP. However, higher core inflation has been a dampener in the first quarter. 

A quick word on Q1 corporate profit estimates

Along with the GDP second estimates, the BEA also released the preliminary estimates for corporate sector profits for March 2023. The pressure on corporate bottom lines continued in the first quarter also. For instance, profits from current production (corporate profits with inventory valuation and capital consumption adjustment) decreased by $151 billion in Q1CY2023 compared to a contraction of $61 billion in Q4CY2022. In absolute terms, profits of US financial companies fell by $25.4 billion in Q1CY2023 compared to a profit fall of $59 billion in the fourth quarter. 

The profits of non-financial companies in the US fell by $109 billion in the first quarter compared to a fall of just $23 billion in Q4CY2022. Clearly, the pressure is showing on industrial numbers for Q1CY2023. Even the global profits of American companies fell by $16.4 billion in the first quarter compared to an increase of $21.4 billion in the fourth quarter of the previous calendar year.

 

Labour tightness is still keeping income levels buoyant

It is hard to say whether this trend is good or bad; but the bottom line is that a tight labour market has kept the income levels buoyant. On the downside, this is also preventing inflation from coming down, but that is another issuer. Here are two highlights.

  • For the March 2023 quarter, the current-dollar personal income increased by $251.3 billion, a downward revision of $27.6 billion compared to the first advance estimate of Q1CY2023 GDP. 

     

  • The real disposable personal income increased 7.8% in the first quarter; a slight downward revision of 20 basis points compared to 8% in the first advance estimate. The personal savings rate as a percentage of disposable personal income is sharply down by 60 bps to 4.2% compared to 4.8% in the first advance estimates.

What are the key takeaways here? The bottom line is that people still have a lot of money and a lot of access to liquidity and that is possibly keeping the inflation under pressure. However, it is lower compared to the first advance estimates, showing the combined impact of Fed tightening and the caution engendered by the banking crisis in the US.

How will the Fed move ahead and its implications for India

To get the best perspective of the Fed move, one has to read the minutes of the May FOMC meet that was published on 24th May 2023 in conjunction with the GDP data. The first estimates had shown pressure on GDP and that has continued in the second estimate also. However, it is not too clear how the US will address this dichotomy. It has been talking about a possible recession from the third quarter of 2023, but most of the high frequency data has been on the positive side. For now, it looks like the Fed may pause in June and possibly affirm that they were close to the top of the rate cycle.

What does this data mean for India? For India, the RBI already appears to have charted the path. India is likely to now focus more on growth and allow inflation to control itself based on the lag effects of monetary tightening. The US GDP slowdown will impact Indian exports and its services trade via tech spending. It now looks like the RBI was ahead of the curve in calling the top as early as April itself.

Related Tags

  • BEA
  • US BEA
  • US Bureau of Economic Analysis
  • US GDP
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