U.S. GDP Comes Lower Than Expected

Many economic forecasters and analysts predicted a recession this Year; however, the US economy defied all their predictions and expectations in 2023. This article – “U.S. GDP Comes Lower Than Expected”, is going to talk about important economic development in the current year (i.e. 2023) unraveling crucial developments, focusing on the Real Gross Domestic Product (GDP) growth, personal income, savings, and the implications for Federal Reserve discussions on potential rate cuts.

Real Gross Domestic Product (Third Estimates) Growth of Third Quarter 

According to the U.S. Bureau of Economic Analysis (BEA), a press release of Third Estimates dated 21.12.2023, the Real Gross Domestic Product (GDP) grew at an Annual Rate of 4.9% for the Third Quarter (Q3). In the second quarter (Q2), the real GDP increased by 2.1%.

The acceleration in real GDP in the third quarter, compared to the second quarter, is mainly due to an increase in consumer spending, exports, and private inventory investment. This was partly offset by a decrease in non-residential fixed investment. Imports have increased in this quarter. 

GDP at Current-Dollar increased by 8.3% at an annual rate (i.e. $547.1 billion) in the third quarter to a level of $ 27.61 trillion. This is a downward revision of $ 34.3 billion from the previous estimates. 

Source: U.S. Bureau of Economic Analysis

The Gross Domestic Purchases Price index for the third quarter has increased by 2.9%, this is a downward revision of 0.1 percentage point from the previous (i.e. Second) estimate. 

Personal Consumption Expenditure (PCE) price index increased by 2.6%. The PCE price index excluding food and energy (Core PCE), has increased by 2.0%. Both PCE and Core PCE have a downward revision of 0.2 and 0.3 percentage points from the previous (i.e. Second) estimate.

Personal Income

Personal Income at Current-dollar increased $195.2 billion in the third quarter – this is a downward revision of $22.1 billion from the previous (i.e. Second) estimate. This increase in the third quarter is primarily attributed to an increase in compensation (led by private wages and salaries), personal interest income (which was balanced by a decrease in personal transfer receipts) and non-farm proprietors’ income. 

Disposable Personal income has increased to $ 143.5 billion (i.e. 2.9%) in the third quarter – this is a downward revision of $0.5 billion from the previous (i.e. Second) estimate. 

Real disposable personal income (adjusted to inflation) has increased by 0.3% – an upward revision of 0.2%. 

Savings

In the third quarter, the personal saving was $851.2 billion – an upward revision of $35.9 billion from the previous estimate. 

The personal saving rate – personal saving rate as a percentage of disposable personal income – was 4.2%, this is an upward revision of 0.2%.

Gross Domestic Income and Corporate Profits

In the third quarter, the Real Gross Domestic Income (GDI) has increased by 1.5% and remains unchanged as in the previous (i.e. second) Estimates.

The Average of Real GDP and Real GDI – a supplemental measure of U.S. economic activity which equals in terms of weights with GDP and GDI – has increased by 3.2% in the third quarter compared to 1.3% (revised figure) in the previous (i.e. second) quarter. This is a downward revision of 0.1 percentage point from the previous (i.e. second) Estimates.

Real GDP by Industry

GDP by Industry or Value Added is a measure of an industry’s contribution to GDP. The private services-producing industries have increased by 4.1% whereas the government sector has increased by 2.0% and the Private good-producing industries have increased by 10.2%. In total, 14 groups (out of 22 groups) have contributed to the third-quarter increase in Real GDP. 

Our Perspective/Conclusion

This means the Federal Reserve may discuss about rate cuts in upcoming meetings – though it has started already in this month’s meeting. However, it’s too early to say to what extent they may go for it.  Monetary easing is on the card for the next two years. A soft landing is no more a mirage, but not seem to be easily possible. And the hard landing is no longer a likely scenario. The inflation is also falling towards the Federal Reserve’s Inflation target. A fairly healthy labor market helps the economy to keep the recession away from next year (hopefully!). But, the debt dynamics have a role to play in the coming months. We hope next two years there will be thriving growth of the economy along with monetary easing. 

In conclusion, the unexpected trajectory of U.S. GDP in 2023 prompts considerations for Federal Reserve discussions on potential rate cuts. While a soft landing seems plausible and inflation inches towards the target, the intricacies of the labor market and evolving debt dynamics present challenges and opportunities for the economy in the coming months.

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