Second Estimate of US Q1-2024 GDP lower by 30 bps at 1.3%

1 Jun 2024 , 03:26 PM

US Q1-2024 GDP DISAPPOINTS AGAIN AT 1.3%

The first advance estimate of US GDP had already disappointed the street at 1.6%, which was sharply lower than the 3.4% reported in Q4-2023 and a whopping 4.9% reported in Q3-2023. In the last 2 sequential quarters, the GDP growth is steadily trending lower showing signs of the Fed tightness playing out in growth. The second estimate of Q1-2024 GDP is still lower by 30 bps at 1.3%. The second estimate and the third estimate, progressively consider more data points and so can be said to be more reliable. Most readers would be aware that 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. This cycle continues each month, such that you have one upgraded GDP estimate being reported each month by the US BEA.

For the quarter to March 2024 (Q1-2024), the US Bureau of Economic Analysis (BEA) has just published the second estimate of GDP growth. The GDP growth rate was 1.6% in the first estimate and has been further lowered to 1.3% in the second estimate. We need to await the final estimate to get a full picture. However, a few data points are quite telling. The real GDP growth has fallen despite lower PCE inflation, on a headline basis and also on a core inflation basis. That means the fall in GDP in the second estimate has been entirely driven by lower estimates of nominal GDP. For instance, the nominal GDP estimate for Q1-2024 has been lower from 4.8% to 4.3% between the first advance estimates and the second estimate. This is obviously more credible with more data points at play. One explanation could be that the growth is getting hit by sustained tightness triggered by the US Fed.

COMPARING FIRST ESTIMATE AND SECOND ESTIMATE FOR Q1-2024

The Q1 GDP growth estimate is down from 1.6% to 1.3%, which is a fairly sharp downgrade in the second estimate for the same quarter. What are the major takeaways.

• The update of Q1-2024 GDP growth which lowered from 1.6% to 1.3%. The second estimate comes with downward revisions to consumer spending, private inventory investments, and federal government spending. These were some of the factors lowering the GDP estimate by 30 bps in the second estimate.
• However, this impact was partially offset by upward revisions to state and local government spending, non-residential fixed investment, residential fixed investments, and exports.
• The imports in the first quarter were revised up, which could be partially attributed to the lag effects of the Red Sea crisis and the delay in delivery schedules of shipments. The net impact of all these factors led to the GDP growth in the second estimate being lowered by 30 bps from 1.6% to 1.3%.

Consumer spending, which has been the backbone of the US economic growth for ages, has been under pressure in the latest quarter ended March 2024. It remains to be seen if the negative lag effects of too much tightness can be effectively managed.

DISSECTING THE Q1 2024 US GDP GROWTH  – SECOND ESTIMATES

The first advance estimate of GDP growth for Q1-2024 had been pegged at 1.6%; which has been further lowered to 1.3% in the second estimate. This is not only lower on a sequential basis for two quarters in a row, but also lower than the street estimates of 2.4% for the first quarter. The sequential GDP growth in the last 4 quarters were 2.2%, 2.1%, 4.9% and 3.4%. In comparison, 1.3% in Q1 2024 is sharply lower. We still need to await the third estimates of the Q1 GDP in end June 2024 to get a clearer picture. Here is a quick dekko of data.

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	1.3
GDP – Goods	6.2	-1.3	0.9	7.3	2.6	-3.5
GDP-Services	2.5	3.2	1.9	2.9	2.8	2.8
Structures	-9.6	8.9	7.7	10.0	10.4	7.9
Auto O/P	-1.2	14.7	15.4	-7.1	-21.8	-7.4
GDP Ex-Auto	2.7	1.9	1.7	5.2	4.2	1.5
Non-farm GVA	2.8	1.8	2.0	5.8	3.8	0.9

Data Source: US Bureau of Economic Analysis (BEA) – # Second Estimates

What exactly has led to lower GDP growth in Q1-2024, plus a downgrade in the second estimates of GDP growth. Here is a quick look at the major driving factors.

• The growth in GDP for physical goods dipped further into the negative in Q1-2024 going from -2.4% in the first estimates to -3.5% in the second estimates. 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 due to geopolitical risks and monetary tightness.
• GDP Services continued to be in the positive as it witnessed limited global impact. In fact, it was one of the factors holding up the GDP figure. GDP Services for Q1-2024. However, that was also lowered in the second estimate from 3.0% to 2.8%; which looks more at par with the previous 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, although there is a downgrade in the second estimate. For instance, in the first estimate of Q1 GDP, the auto output contraction was -6.4%; which was lowered to -7.1% in the second estimate. That is at par with Q4 2023, but still much better than Q3-2023. However, GDP ex-auto continues to be tepid and has bene lowered by 30 bps from 1.8% to 1.5% in the second estimate of Q1-2024 GDP.
• The non-farm GVA (gross value added) fell to 1.3% in Q1-2024 in the first estimate, but has been further lowered to 0.9% in the second estimate. This compares unfavourably with 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; second estimates.

HOW PERSONAL INCOMES SHAPED IN Q1 (SECOND ESTIMATE)

How did the personal incomes compare for Q1; between the first advance estimate and the second estimate. Let us start with the macro picture of current dollar GDP (nominal GDP), which increased by 4.3% or by $298.9 Billion, in the first quarter of 2024 to $28.26 Trillion; a downward revision of $28.6 Million from the previous estimates. The real story here is that the lower of GDP growth in the second estimates has been triggered by sharply lower nominal GDP estimates. That means output is actually falling. The real GDP growth has fallen despite a 10 bps advantage in inflation adjustment.

Let us now turn to the current-dollar personal income (nominal terms), which saw an absolutely accretion of $404.4 Billion in the first quarter, which is a slight downward revision of $2.6 Billion compared to the first estimates. The increase essentially reflects increase in compensation (led by private wages and salaries), and personal current transfer receipts (let by government social benefits). There were no offsetting factors in Q1.

Let us now move to a picture of the surpluses as depicted by the disposable personal income (DPI). For Q1-2024 (second estimate), the DPI increased by $266.7 Billion (5.3%), which is an upward revision of $40.5 Billion compared to the first advance estimates. Real disposable personal income net of the inflation effect, also increased 1.9% in the first quarter of 2024, which is an upgrade of 80 bps over the first advance estimate for Q1. Here again, it is the lower 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; but higher than the first estimates of Q1-2024 GDP growth. In Q1-2024, the personal saving stood at $796.6 Billion, an upward revision of $96.6 Billion compared to the first advance estimates. As a result, the personal savings rate, personal savings as a percentage of disposable personal income, was 3.8% in Q1-2024 an upgrade of 20 bps from the first advance estimates at 3.6%.

UPDATES TO Q1 AND Q4 CORPORATE PROFIT NUMBERS

Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) actually fell by $21.1 Billion in the first quarter. This is in stark contrast to a robust increase of $133.5 Billion in Q4-2023. How did the profit performance of the financials and the non-financials pan out in the first quarter? Profits of domestic US based financial corporations increased by a hefty $73.7 Billion in the first quarter, compared with a very marginal increase of $5.9 Billion in Q4-2023. On the contrary, the profits of domestic non-financial corporations (industrials and services) decreased by $114.1 Billion in Q1-2024; as against an increase of $136.5 Billion in Q4-2023. Rest-of-the-world profits in Q1-2024 increased $19.3 Billion, in contrast to a decrease of $8.9 Billion in Q4-2023. In the first quarter, receipts increased $29.8 Billion, and payments increased $10.5 Billion. Overall, the financials have shown a sentimental rebound in the first quarter of 2024.

HOW CME FEDWATCH REACTED TO Q1-GDP SECOND ESTIMATES

The US markets did not react too sharply to the US GDP data. On the positive side, if the GDP is being impacted by the monetary tightness, then it only means that the Fed objective is being achieved. Hence, the Fed should not have much to complain about. However, a lot will still depend on the PCE inflation to be announced on Friday. The PCE inflation is expected to be flat to neutral for April. Here are the CME Fedwatch probabilities.

Fed Meet	325-350	350-375	375-400	400-425	425-450	450-475	475-500	500-525	525-550	550-575
Jun-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	98.9%	1.1%
Jul-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	12.3%	86.8%	1.0%
Sep-24	Nil	Nil	Nil	Nil	Nil	Nil	5.4%	45.1%	49.0%	0.5%
Nov-24	Nil	Nil	Nil	Nil	Nil	1.4%	15.8%	46.1%	36.3%	0.4%
Dec-24	Nil	Nil	Nil	Nil	0.7%	9.0%	31.7%	40.9%	17.4%	0.2%
Jan-25	Nil	Nil	Nil	0.2%	3.5%	16.5%	34.8%	33.1%	11.7%	0.1%
Mar-25	Nil	Nil	0.1%	1.6%	9.1%	24.4%	34.1%	23.9%	6.7%	0.1%
Apr-25	Nil	Nil	0.6%	3.9%	13.8%	27.4%	30.9%	18.6%	4.7%	Nil
Jun-25	Nil	0.3%	2.1%	8.5%	20.0%	29.0%	25.3%	12.2%	2.6%	Nil
Jul-25	0.1%	0.9%	4.3%	12.4%	23.1%	27.7%	20.8%	8.9%	1.2%	Nil

Data source: CME Fedwatch

The broad theme remains the same. The CME Fedwatch is expecting its first Fed rate cut in September 2024, at which point the market is assigning a little over 50% probability that the first rate cut could happen. This is a fair chance of it happening. By December 2024, there is a 42% probability that there would be two rate cuts. That is slightly lower optimism than before but the under current has not changed at all. What about the outlook for 2025. That is still too hazy and will keep evolving as the time goes by. Most likely, the probabilities will shift sharply once the first rate cut is implemented by the Fed. For 2025, the markets are pencilling in a 70% probability of 3 rate cuts and a 42% probability of 4 rate cuts.

HOW WILL RBI INTERPRET Q1-2024 US GDP SECOND ESTIMATE

There are 2 things that RBI would focus on viz. the nominal GDP data and the implied rate of inflation. The nominal growth rate in GDP has fallen sharply in the second estimate to 4.3%. The sharp nominal GDP growth downgrade in the second estimate could be the first indication that the persistent Fed tightness is starting to show on the output. For India, it is the nominal GDP that determines the flow of trade orders to India, both on the goods and the services front. However, inflation could hold the key, and PCE inflation is still sticky.

RBI has more pressing domestic issues to ponder over. Q4 results have been under pressure, and high rates are again hitting Indian corporates. For now, RBI is on wait and watch mode; at least till election results are out and the final budget is presented in mid-July. Post that, the RBI may opt for a more aggressive approach by resorting to pre-emptive rate cuts. As the RBI has shown in the past, it would not hesitate to take the initiative, if it had the potential to boost growth, without overly spiking inflation. We have to wait for July 2024.