6 mins read . 30 Jan 2023
For the quarter that ended in December 2022, the US Bureau of Economic Analysis (BEA) announced the first estimate of GDP growth. GDP estimates for each quarter are put out by the BEA 3 times viz. advance estimate, second estimate and the final estimate. The second and final estimates will be put out on 23rd February 2023 and 30th March 2023 respectively. The first advance estimate of GDP growth for Q4 is 2.9%; which is 30 bps lower than the Q3 final number. However, it must be remembered that the Q3 advance estimate was 2.6%, which was upgraded to 2.9% in the second estimate and further to 3.2% in the final estimate. So, there is hope for a further upgrade in the Q4 GDP for the US.
Here are some of the key factors that triggered the 2.9% Q4 GDP in the US.
a) The biggest driver for real GDP growth of 2.9% in Q4CY22 was private inventory investments and consumer spending. The former was on the back of expectations that business conditions would turn around.
b) While inventory accretion came from petroleum, coal, chemicals, mining and utilities, consumer spending was strong across goods and services. The positive growth in consumer spending was led by healthcare, personal care and motor vehicles.
c) Let us talk about what put pressure on the GDP? Major pressure points on the GDP growth came from exports and residential investments. Housing was impacted by higher mortgage rates while lower imports offset the export pressures.
• What explains the high level of consumer spending, despite higher inflation. This can be attributed to higher wages, more than 11 million jobs created in 2 years and low levels of unemployment at 3.5%. Rate hikes are not translating into spending cuts.
• On the positive side, let us focus on lower imports. The fall in imports in Q4CY22 reflected a decrease in goods and services imports in the quarter. Consumer goods imports and transport services led to a fall in imports.
• The sharp fall in housing investments is putting substantial pressure on GDP numbers. That was bound to happen, as rate hikes have an immediate impact on consumer mortgage investments and only later on via consumer spending.
• There is an inflation angle to the story. Real GDP growth for CY22 is expected to be 2.1 against 5.9% in CY21. However, nominal GDP in CY22 was at 9.2% YoY compared to 10.7% in CY21. Nominal GDP is robust and inflation is pushing real GDP down.
Fed has already hiked rates by 425 basis points till December 2022 and as per the minutes of the last meeting, it is poised for another 75 bps in this year. Here is what we can infer from the GDP data in terms of its implications for the rate stance of the US Federal Reserve.
• One must not forget that the 2.9% figure is the first GDP estimate for Q4CY22 and this is still higher than the first estimate of real GDP growth for Q3CY22, which had been pegged at 2.6%. Economists have flagged concerns about a hard landing for the US economy, but current data shows that the GDP pressure can be managed.
• Instead of the GDP, the Fed may focus more on the jobs data. Unemployment rate is down to multi-year lows of 3.5% and the US economy has added 11 million jobs since the start of 2021. This has boosted purchasing power substantially and even diluted the impact of rate hikes on inflation. That could impel the Fed to persist for longer.
• As of now, the inflation outcomes are yet to be seen. The last inflation count is still 350 bps above the target inflation rate of 2.5%. For now, the Fed is likely to carry on with rate hikes and even combine it with monetary tightness via bond buying.
The quick takeaway is that despite concerns expressed in several quarters, the GDP impact of Fed hawkishness is limited. After 2 negative quarters in 2022, US GDP has bounced back sharply. For now, the Fed’s focus would be on the labour data, which will hold the key to inflation outcomes. Macro equations become a lot more complex than envisaged.