First Estimate of US Q1-2024 GDP shocks markets at 1.6%

26 Apr 2024 , 09:13 AM

US Q1-2024 GDP DISAPPOINTS AT JUST 1.6%

To a large extent, the first advance estimate of Q1FY24 US GDP disappointed the street at just 1.6%. This comes in the aftermath of 3.4% in the fourth quarter of 2023 and an impressive 4.9% in the third quarter of 2023. Clearly, the momentum has been faltering and it also partially has to do with the growing base effect. But before that, a quick word on the GDP estimates of the US economy. After the completion of each quarter, the US economy puts out 3 estimates for the GDP growth of that quarter. In the first month, the first advance estimate is put out, followed by the second estimate and the final estimate at the end of the second and third month. After that, a similar cycle starts for the next quarter. On a regular basis, the second and third estimates see either an upgrade or a downgrade based on additional data points flowing in.

For the quarter to March 2024 (Q1-2024), the US Bureau of Economic Analysis (BEA) has published the first estimate of first quarter growth for 2024. The GDP growth rate at 1.6% is sharply lower than the previous 2 quarters. Of course, this is only the first advance estimate and will undergo further changes in the second and the final estimate. This is also sharply lower than the Atlanta Fed GDP estimate which had pegged the GDP growth for the first quarter between 2.6% and 2.8%. It would, therefore be interesting to see what were the factors that actually pushed the Q1 GDP to 1.6%.

WHAT TRIGGERED 1.6% REAL GDP GROWTH IN Q1-FY24

Here is a quick look at the specific factors that gave an upward boost to US GDP in the first quarter and the factors that pulled down the GDP in the first quarter.

• The increase in the GDP in the first quarter was primarily reflective of the increases in consumer spending and housing investment. However, this was partially offset by  that were partly offset by a decrease in inventory investment. In addition, the imports, which are a subtraction in the calculation of GDP, increased in the first quarter of 2024.

• The increase in the consumer spending during the quarter was largely a reflection of an increase in services. However, this was partially offset by decrease in goods. There were some pressure points even within goods and services. For instance, within services the key contributors to the increase were health care, financial services, and insurance. On the goods front, the major contributors to the decrease were motor vehicles and parts as well as gasoline and other energy goods.

• In the first quarter, there were visible signs of increase in housing investment; but largely led by broker commissions and other ownership transfer costs as well as new single-family housing construction. This is a segment that has gradually turned around in the past few months after several months of the housing sector staying tepid due to a sharp spike in the interest costs.

• The quarter also witnessed some decrease in inventory investment which was triggered by decreases in wholesale trade and manufacturing. The deceleration in real GDP growth in the first quarter to 1.6% essentially reflected a slowdown in consumer spending, exports, and state and local government spending; apart from a visible downturn in federal government spending. These negative triggers were compensated by an acceleration in housing investment.

Overall, the consumption and the lower government boost to spending were the key causes impact the growth in real GDP of the US economy in the first quarter.

DISSECTING THE Q1 2024 US GDP GROWTH 

The first advance estimate of GDP growth for Q1-2024 stood at 1.6%. This is not just lower on a sequential basis, but also lower than the street estimates. For instance, the sequential GDP growth in the last 4 quarters were 2.2%, 2.1%, 4.9% and 3.4%. In comparison, 1.6% in Q1 2024 is sharply lower. We have to wait for the second and third estimates of the Q1 GDP over the next 2 months to get a clearer picture. The GDP growth estimate for Q1-2024 was also lower than the street estimates, which had pegged GDP growth in the first quarter in the range of 2.4% to 2.6%. In fact, Atlanta Fed GDP estimates were closer to 2.8%. The table captures the break-up of the 1.6% GDP growth for Q1, juxtaposed with recent 5 quarters.

GDP Data	Q4-2022 YOY (%)	Q1-2023 YOY (%)	Q2-2023 YOY (%)	Q3-2023 YOY (%)	Q4-2023 YOY (%)	Q1-2024 YOY (%) #
GDP Overall	2.6	2.2	2.1	4.9	3.4	1.6
GDP – Goods	6.2	-1.3	0.9	7.3	2.6	-2.4
GDP-Services	2.5	3.2	1.9	2.9	2.8	3.0
Structures	-9.6	8.9	7.7	10.0	10.4	6.5
Auto O/P	-1.2	14.7	15.4	-7.1	-21.8	-6.4
GDP Ex-Auto	2.7	1.9	1.7	5.2	4.2	1.8
Non-farm GVA	2.8	1.8	2.0	5.8	3.8	1.3

Data Source: US Bureau of Economic Analysis (BEA) - # First Estimates

What exactly has led to this sharp fall in the GDP growth in Q1-2024. Here is a quick look at the major driving factors.

• The growth in GDP for physical goods dipped into the negative in Q1-2024 at -2.4%. IN the last two sequential quarters, this figure had been +7.3% and +2.6%. It seems to be more an outcome of demand compression amidst the worsening Red Sea crisis.

• GDP Services continued to be robust as it had limited visibility of global impact. In fact, it was one of the factors holding up the GDP figure. GDP Services for Q1-2024 grew at 3.0%, which is higher than 2.8% and 2.9% in the last 2 sequential quarters.

• The auto output continues to be negative, putting pressure on overall manufacturing output. However, the extent of the fall has been reduced in Q1. For instance, in Q1-2024, the auto output contraction was -6.4%, compared to -21.8% and -7.2% in the previous two sequential quarters. However, GDP ex-auto has also been tepid at 1.8%.

• The non-farm GVA (gross value added) fell to 1.3% in Q1-2024 compared to 3.8% and 5.8% in the last two sequential quarters. The pressure is clearly coming from the geopolitical and trade impact on industrial output.

Let us now turn to how the personal incomes shaped in Q1-2024.

HOW PERSONAL INCOMES SHAPED UP IN Q1 (FAE)

Let us start with the macro picture of current dollar GDP (nominal GDP), which increased by 4.8% or by $327.5 Billion, in the first quarter of 2024 to $28.28 Trillion. It may be recollected that in the fourth quarter, the nominal GDP had grown by 5.1% or $346.9 billion. Clearly, the nominal growth in Q1 appears to be just about 30 bps away from the nominal growth in Q4, so most of the pressure has come on real GDP growth from inflation adjustments. In other words, the price index increased by 3.1% in the first quarter as compared with just 1.9% in the fourth quarter of 2023 and that has been a key factor in the sharp fall in real GDP to 1.6% in Q1-2024.

Let us now turn to the current-dollar personal income (nominal terms), which saw an absolutely accretion of $407.1 Billion in the first quarter, compared with an increase of $230.2 billion in Q4-2023. The increase essentially reflects increase in compensation, and personal current transfer receipts. 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 Q1-2024, the DPI increased by $226.2 Billion (4.5%). It may be recollected that in Q4-2023, the disposable personal income (DPI) had shown an increase of $190.4 billion (3.8%). Real disposable personal income net of the inflation effect, also increased 1.1% in the first quarter of 2024, compared to a 2.0% increase in the fourth quarter of 2023. Here again, it is the higher inflation impact playing its part.

The personal savings in the first advance estimate for Q1-2024 was lower compared to the Q4 final estimate for 2023. In Q1-2024, the personal saving stood at $755.7 Billion compared to $815.5 billion in the fourth quarter. As a result, the personal savings rate, personal savings as a percentage of disposable personal income, was 3.6% in Q1-2024 compared to 4.0% in Q4-2023.

WHY US MARKETS WERE DISAPPOINTED WITH Q1-GDP NUMBERS

The US markets reacted negatively to the Q1-GDP numbers. The Dow and the NASDAQ fell sharply as did the S&P 500. In addition, the US bond yields also spiked to above 4.70%, the highest level since November 2023. The real villain of the piece was not the fall in real GDP, but the fact that the fall in real GDP was caused by a spike in inflation. The higher than expected PCE inflation for Q4 and Q1 indicates that March PCE inflation to be announced on Friday could be higher than expected. One way to evaluate the impact on markets is to see the rate cut probabilities implied in the CME Fedwatch, captured in the table below.

Fed Meet	325-350	350-375	375-400	400-425	425-450	450-475	475-500	500-525	525-550	550-575
May-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	99.4%	0.6%
Jun-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	14.3%	85.2%	0.5%
Jul-24	Nil	Nil	Nil	Nil	Nil	Nil	3.2%	30.4%	66.0%	0.4%
Sep-24	Nil	Nil	Nil	Nil	Nil	1.3%	14.1%	44.6%	39.7%	0.2%
Nov-24	Nil	Nil	Nil	Nil	0.3%	4.2%	20.9%	43.5%	30.9%	0.2%
Dec-24	Nil	Nil	Nil	0.1%	1.8%	10.7%	29.8%	38.6%	18.9%	0.1%
Jan-25	Nil	Nil	Nil	0.6%	4.2%	15.8%	32.1%	33.4%	13.9%	0.1%
Mar-25	Nil	Nil	0.2%	2.0%	8.7%	22.2%	32.6%	25.7%	8.5%	0.1%
Apr-25	Nil	0.1%	0.7%	3.6%	12.1%	24.8%	30.9%	21.5%	6.4%	Nil
Jun-25	Nil	0.3%	2.0%	7.4%	17.7%	27.5%	26.7%	14.8%	3.6%	Nil

Data source: CME Fedwatch

A number of surprising changes have happened after it became evident that the latest fall in GDP in Q1 has been triggered by higher inflation. For instance, for quite some time, the probability of rate hikes by the Federal Reserve had been ruled out, but now these probabilities are back, albeit in a small way. Now, the CME Fedwatch is betting on the first rate cut happening only in December this year, which would leave the markets with just one rate cut in 2024. Clearly, the inflation data shows that prices are much stickier than expected, and as the hawks within the Fed had warned, the last mile inflation control is proving to be the toughest part of the game.

HOW WILL RBI INTERPRET Q1-2024 US GDP UPDATE?

There are 2 things that India would look at viz. the nominal GDP data and the implied rate of inflation. The nominal growth rate in GDP even in the first quarter is robust at 4.8%. While it is lower than 5.4% in Q4-2023, there is not much to be concerned about. For India, it is the nominal GDP that determines the flow of trade orders to India, both on the goods and the services front. One message coming from the combination of PCE data, GDP data and the CME Fedwatch is that is that higher inflation is far from being done and dusted in the US. As fared last year, it is having its impact on real GDP, if not so much on nominal GP. Of course, much of the cyclical disruptions are an outcome of the Red Sea crisis and things should improve once that is under control.

RBI would be keeping one eye at global hawkishness and the US economy. However, the RBI has more pressing domestic issues to worry about. Q4 results have been under pressure, both on the top line and the bottom line. Secondly, financial stress is showing as rate of interest on loans has not come down in India. For now, RBI may be on hold and wait for the outcome of the general elections in early June and the formation of the new government. Once that is done, the next thing to look for is the passage of the full budget. The RBI is most likely to even look at the prospects of rate cuts only after that!