Second Estimate of US Q2-2024 GDP upgraded to 3.0%

30 Aug 2024 , 10:28 AM

US Q2-2024 GDP GROWTH SECOND ESTIMATE UPPED TO 3.0%

The first advance estimate of US GDP for the June 2024 quarter had been announced by the US Bureau of Economic Analysis (BEA) at 2.8%. Now the updated second estimate of Q2 GDP for the US economy has been further upgraded by 20 bps to 3.0%. It may be recollected that the GDP growth had dipped to 1.4% in the first quarter ended March 2024. In comparison, the second estimate of Q2 GDP growth is a full 160 bps higher. That should come as a sharp rejoinder for the sceptics who are screaming about the US economy hard landing. Apparently, too much has been read into just one month of weak labour data, but the second estimate of Q2 GDP at 3.0% is an affirmation of the fact that the US economy is nowhere near the risk of a hard landing. One can argue that the current GDP in Q2 is still much lower than the 3.4% GDP growth reported by the US economy in Q4FY23 and the record 4.9% GDP growth reported in Q32023.

However, it must be remembered that this is happening on a much higher base; and so, some provision has to be made for the higher base effect. This is still only the second estimate and the final estimate of Q2 GDP will only be out in the end of September. The table below captures the shift between the advance estimate and second estimate of Q2 GDP for year 2024.

Macro Variable	Q2 – Advance Estimate	Q2 – Second Estimate
Real GDP Growth	2.8%	3.0%
Current Dollar GDP Growth	5.2%	5.5%
PCE Price Index	2.6%	2.5%
Core PCE Index	2.9%	2.8%

Data Source: US Bureau of Economic Analysis (BEA)

If you look at the 20 bps upgrade of the second GDP estimate for Q2-2024 over the first advance estimate, then there have been two favourable factors. Firstly, the nominal GDP is up by 30 bps and secondly, the inflation factor is also lower by 10 bps. In short, growth has been better than expected while the inflation has been lower than expected.

4-FACTOR MODEL – WHAT TRIGGERED NOMINAL GDP GROWTH IN Q2-2024

The table below, breaks up the GDP growth into user end items like private consumption expenditure, private domestic investment, international trade, and government spending to spot the trends of the last 4 quarters.

GDP Data	Q3-2023 YOY (%)	Q4-2023 YOY (%)	Q1-2024 YOY (%)	Q2-2024 YOY (%) #
Private Consumption Expenditure	2.4	2.5	2.7	2.6
Gross Private Domestic Investment	0.3	2.0	3.7	6.1
Exports	-0.3	1.5	1.1	3.3
Imports	-2.7	-0.1	1.5	4.9
Government Spending & Investment	4.6	4.2	2.9	3.1
Nominal GDP Growth	5.9	5.7	5.8	5.9

Data Source: US Bureau of Economic Analysis (BEA) # = Second Estimate

Here is a quick look at each of the four drivers in the 4 factor model above for nominal growth.

• The nominal GDP is higher compared to the previous two quarters, which is one of the most affirmative signals that growth is happening. The real growth in the quarter has been a combination of support from higher nominal growth rate and from lower inflation levels.
• Private consumption expenditure has been one of the key drivers of the US economy. That is slightly lower at 2.6% compared to 2.7% in the previous quarter. However, it is still higher than Q3 and Q4 of last year, which means the Federal Reserve may not be too aggressive on rate cuts.
• Let us now turn to gross private domestic investment. It has spiked from 3.7% in the first quarter to 6.1%, showing a sharp spike in private investments. If you look at the last 4 quarters, the high growth in Q3 and Q4 of 2023 was driven by higher government spending. In contrast, this quarter it is about private domestic investment.
• There is a visible pick-up in international trade as estimated by the WTO. However, the spike in imports is not only sharper than exports, but also much sharper than the imports of the previous quarters. The Middle East supply route constraints are putting a cost in the form of higher imports.
• The role of government spending in the GDP growth has come down sharply compared to Q3 and Q4 of the previous year, which is a signal that the role of private investment is taking over from government spending in driving growth.

Let us turn to the break-up of GDP in Q2 as compared to the first quarter of 2024 and the four preceding quarters prior to that.

DISSECTING THE Q2 2024 US GDP GROWTH  – SECOND ESTIMATE

With the second estimate of Q2-2024 GDP out, there is upgraded data on how the GDP growth has moved in the last 6 quarters on yoy basis and what triggered this move. The first advance estimate of Q2-2024 GDP growth came in at 2.8%, which in itself was 140 bps higher than the final Q1 figure. However, the second estimate of Q2-2024 GDP has further upgraded the GDP growth estimate by 20 bps to 3.0%. A clearer picture will emerge once the third GDP update comes in end September. Here is a quick look at the data.

GDP Data	Q1-2023 YOY (%)	Q2-2023 YOY (%)	Q3-2023 YOY (%)	Q4-2023 YOY (%)	Q1-2024 YOY (%)	Q2-2024 YOY (%) #
GDP Overall	2.2	2.1	4.9	3.4	1.4	3.0
GDP – Goods	-1.3	0.9	7.3	2.6	-3.8	5.0
GDP-Services	3.2	1.9	2.9	2.8	3.0	2.5
Structures	8.9	7.7	10.0	10.4	9.7	-0.8
Auto O/P	14.7	15.4	-7.1	-21.8	-2.7	25.6
GDP Ex-Auto	1.9	1.7	5.2	4.2	1.5	2.4
Non-farm GVA	1.8	2.0	5.8	3.8	1.0	3.5
Goods Share	-0.4	0.3	2.3	0.8	-1.2	1.5
Services Share	1.9	1.1	1.7	1.7	1.8	1.5

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

What exactly has led to a sharp spike in the GDP growth in Q2-2024 to 3.0% (second estimate), as compared  to a tepid level of 1.4% in the sequential first quarter.

• The growth in GDP for physical goods bounced back sharply to 5.0% from a deeply negative -3.8% in the first quarter. We now have to await the third estimate of GDP. In the last two sequential quarters, this figure had been +2.6% and -3.8%. The increase in GDP reflected increase in consumer spending, private inventory investment and non-residential fixed investment. Imports put pressure on the GDP growth.
• GDP Services continued to be in the positive as it witnessed limited global impact. GDP Services for Q2-2024 stood at 2.5% as compared to 3.0% in the sequential previous quarter and 2.8% before that. However, the second estimate at 2.5% is 40 bps higher than the first estimate. Clearly, the momentum in services appears to have bounced back as per the second estimate. We have to await the third estimate for full picture.
• The auto output turned around to 25.6% as of the second estimate, lower than 28.5% as projected in the first advance estimate. Auto output had been in the negative zone for 3 quarters in a row. We have to wait and see how the final estimates work out for the quarter. Since the turnaround was rapid, we saw a sharp adjustment in the second estimate and we could see further tumult in the third estimate too.
• The non-farm GVA (gross value added) rose to 3.5% in Q2-2024 as per the second estimate. That is 20 bps higher than the figure in the first advance estimate. However, the non-farm GVA is still sharply lower compared to the third and fourth quarters of the previous year. This shows a sharp spike in industrial output and that is also reflected in the sharp spike in the goods output.
• Finally, let us look at the last two rows, which capture the contribution of goods and services to the change in GDP. GDP goods is back to having a positive impact on the GDP growth after briefly making a negative contribution in the first quarter. On services, the impact continues to be positive. As per the second estimate, both goods and services each contributed half of the 3.0% GDP growth in the second quarter.

Let us now turn to how the personal incomes shaped in Q2-2024; second estimates.

HOW PERSONAL INCOMES SHAPED IN Q2 (SECOND ESTIMATE)

How did the personal incomes compare as per the second estimate for Q2, as compared to the first advance estimate of Q2? Let us start with the macro picture of current dollar GDP (nominal GDP), which increased by 5.5% or by $353.2 Billion to $28.65 Trillion, as per the second estimate of Q2; which is an upward revision of $23.2 Billion compared to the first advance estimate.

Let us now turn to the current-dollar personal income (nominal terms), which saw an absolutely accretion of $233.6 Billion in the second estimate of Q2. This is a downward revision of $4.0 Billion compared to the first advance estimate. The increase in current dollar personal income reflected increases in compensation and personal current transfer receipts.

Let us now move to the disposable personal income (DPI). For Q2-2024 (second estimate), the DPI increased by $183.0 Billion (+3.6%). That is a downward revision of $3.2 Billion compared to the first advance estimate. Real Disposable Personal Income increased by 1.0%, which is absolutely the same as the first advance estimate.

The personal savings in the second estimate for Q2-2024 stood at $686.4 Billion. This is a downward revision of $34.1 Billion compared to the first advance estimate. The personal savings rate (as measured by personal savings as a share of DPI), was 3.3% as per the second estimate of Q2-2024 GDP, which is a downward revision of 20 bps compared to the first advance estimates for the second quarter.

HOW CORPORATE PROFITS PANNED OUT IN THE SECOND QUARTER

Here is a quick update on how the corporate profits of American companies panned out in the second quarter ended June 2024. The profits from current production (corporate profits with inventory valuation and capital consumption adjustments) showed an increase of $57.6 Billion in the second quarter of 2024. In comparison, it may be recollected, that the current production had actually fallen by $47.1 Billion in the first quarter of 2024. Let us now break up the performance of domestic and global businesses of US corporates. The profits of domestic financial corporations increased $46.4 Billion in Q2-2024, compared with an increase of $65.0 Billion in the first quarter of calendar 2024. At the same time, the profits of domestic nonfinancial corporations increased $29.2 Billion, in contrast to a decrease of $114.5 Billion in the first quarter. There is a revival I corporate performance in Q2. ROW profits decreased by $18.0 Billion, in contrast to an increase of $2.3 Billion in the first quarter. In the second quarter, receipts decreased $6.2 Billion, and payments increased $11.8 Billion. Overall, it has been a gratifying corporate season for US corporates.

HOW CME FEDWATCH REACTED TO Q2-GDP SECOND ESTIMATES

The US benchmark 10-year bond yields and the US dollar index tapered post the GDP announcement and that could be because it reduces the probability of aggressive rate cuts by the US Federal Reserve. Here are the CME Fedwatch probabilities.

Fed Meet	250-275	275-300	300-325	325-350	350-375	375-400	400-425	425-450	450-475	475-500	500-525
Sep-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	34.5%	65.5%
Nov-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	9.8%	43.3%	47.0%	Nil
Dec-24	Nil	Nil	Nil	Nil	Nil	4.1%	24.0%	44.8%	27.1%	Nil	Nil
Jan-25	Nil	Nil	Nil	0.6%	6.8%	26.7%	42.5%	23.5%	Nil	Nil	Nil
Mar-25	Nil	0.1%	1.3%	9.2%	28.6%	40.2%	20.6%	Nil	Nil	Nil	Nil
May-25	Nil	1.0%	7.1%	23.6%	37.2%	25.7%	5.3%	Nil	Nil	Nil	Nil
Jun-25	0.6%	4.9%	17.7%	32.4%	29.8%	12.6%	1.9%	Nil	Nil	Nil	Nil
Jul-25	2.9%	10.6%	24.2%	31.2%	22.1%	7.8%	1.1%	Nil	Nil	Nil	Nil
Sep-25	6.5%	15.3%	26.6%	28.1%	17.2%	5.5%	0.7%	Nil	Nil	Nil	Nil
Oct-25	10.1%	18.0%	27.0%	25.5%	14.4%	4.4%	0.5%	Nil	Nil	Nil	Nil
Dec-25	12.8%	19.3%	26.8%	23.9%	12.9%	3.8%	0.4%	Nil	Nil	Nil	Nil

Data source: CME Fedwatch

Here is a quick dekko at how the rate cut probabilities have panned out after the GDP second estimate for Q2-2024.

• Currently, the CME Fedwatch has assigned a 100% probability that the first rate cut will happen in September. However, there is increasing evidence of ultra aggression from the CME Fedwatch. The CME Fedwatch assigned 100% probability for 50 bps rate cut in November, while there is a 47.0% probability that there could be 75 bps of rate cuts by November 2024 itself. In addition, the expectation by December 2024 is a 100% probability of 75 bps rate cut and a 72.9% probability of a 100 bps rate cut.
• What about the CME Fedwatch expectations for 2025? By June 2025, the CME Fedwatch is factoring in 100% probability of 125 bps of rate cut and 98.1% probability of 150 bps of rate cut by June 2025. We now have CME Fedwatch expectations till December 2025. The CME Fedwatch is assigning a probability of 95.8% probability of 175 bps of rate cuts by September 2025 and an 83% probability of a 200 bps rate cut by December 2025. This is much quicker than the most aggressive long term estimates by the Federal Reserve.

Will the Fed adhere to such an aggressive tune? That is what we need to keep our fingers crossed about.

FINGERS CROSSED, BUT FED IS UNLIKELY TO OBLIGE

The rate cut path suggested by CME Fedwatch is much more aggressive than the Fed guidance. With labour most likely a flash in the pan and GDP bouncing back in Q2, Fed would be more than cautious about such aggressive rate cuts. Clearly, that is not going to happen and it is starting look more like wishful thinking by the CME Fedwatch. Half the members of the FOMC are still veering towards the hawkish side. Fed does not want an embarrassment where it has to reverse its action. September will give the first clear idea!