3Q23 GDP Final Cut: Swing and a Miss on 5%, Good Contact on PCE Prices
We look at the final tally for 3Q23 as GDP growth falls back under the 5% line.
The 3Q23 GDP celebration for 5% handle bragging rights just struck out in its third and final “at bat.”
On a positive note, the PCE Price Index for 3Q23 dropped down to 2.6% in the final estimate from 2.8% in second est. and 2.9% in the advance est.
The Core PCE Price index just hit the magic 2.0% line for 3Q23 after 2.3% in the second est. and 2.4% in the advance est.
In this brief note, we look at this morning’s main moving parts in the final 3Q23 GDP release. The latest revisions took headline GDP down to 4.9% for the final read after it was bumped up to 5.2% on the second estimate after being 4.9% on the advance reading. There was plenty of action by line item in the fine print.
We looked at the moving parts in earlier commentaries (see 3Q23 GDP: Fab Five 11-29-23, GDP 3Q23: Old News or Reset? 10-26-23). The solid PCE line is still a fact just like the fixed asset investment trends we have highlighted (see Fixed Investment in GDP: The Capex Journey 10-30-23). PCE was tempered mostly on Services spending. On the investment side, Structures in nonresidential saw a material increase.
The relative performance comparison of the Trump vs. Biden terms will need to get tweaked as we update for final numbers (see Tale of the Tape in GDP: Trump vs. Biden 12-4-23), but the comparison brings us to the same in conclusion. The fact remains that we have backward looking numbers that are strong and the Fed’s favorite inflation benchmark (PCE) is dropping in the revisions. We will get fresh numbers for the November PCE this Friday.
Just to wrap the 3Q23 GDP collection with the “circle gets the square” recap, we summarize the main movers we like to watch across PCE, GPDI, and Government:
Personal Consumption Expenditures (PCE): Table 1 data (% change from preceding period) saw PCE move down to 3.1% in final est. from 3.6% in the second est. We see the Goods line in PCE now at +4.9% vs. the earlier +4.7% as Nondurables rose to +3.9% from +3.5%. Durables ticked slightly lower from +6.8% to +6.7%. The key driver of the change was in Services where the second est. of +3.0% dropped to +2.2% in the final.
Gross Private Domestic Investment (GPDI): GPDI was all over the place in this latest revision, but the headline GDPI number only declined from +10.5% to +10.0%. The overall Fixed Investment headline category was higher in the revision from +2.4% to +2.6%. The biggest gain in fixed investment was Structures, which rose to +11.2% from +6.9%. Residential was also raised from +6.2% to +6.7%. Declines include Equipment, which was down to -4.4% from -3.5%. Intellectual Property Products declined to +1.8% from +2.8%. When the smoke cleared on the moving parts, GPDI remains a very favorable part of the 3Q23 GDP trend.
Government Consumption Expenditures and Gross Investment: The Government line moved higher to +5.8% in the final est. from +5.5% in GDP growth in the second. That came mostly on the back of higher State and Local outlays, which moved from adding +4.6% to +5.0%. As a reminder, the Government line is around 17.4% of GDP, much like GPDI which was 17.8% of GDP at 3Q23. The State and Local line is 63% of the Government line and just under 11% of GDP. The Federal GDP line shows Defense at 3.6% of GDP and non-defense Federal at 2.8%. Those who would shut the government down and would rather default on UST debt are doing that over 2.8% of GDP. Seems like bad math to destroy the financial system over whittling down 2.8% of GDP, but that trade-off was heartily supported by the former President until then-Speaker McCarthy cut a deal that won handily in a bipartisan vote. That deal might have cost the speaker his job.
That history will be a reminder of rising political risk as a factor in US economic handicapping. The budget hawks can demand a safer world to whittle down defense outlays, but more than a little history shows that it takes a large defense line to make a world safe (think Ronald Reagan). The trick in defense spending is “don’t spend it on bad wars” (Iraq) or “use it wisely to achieve defined ambitions” (Afghanistan) and then get out in orderly fashion (not Afghanistan or Iraq). Budgets get harder to strike as Congress grows more ignorant and vicious and fundraises off fiction, fear, and loathing rather than fact. Good times.
The best news in the mix was the downward revisions in PCE inflation as noted in the bullets. The fixed investment line showed the boom in Structures, but the numbers also signal the relative weakness in Equipment. That gets back to the reshoring theme and mixed views on economic prospects for the manufacturing sector (see Industrial Production: Steady Course, No Signs of Fade or Flourish 12-15-23).
With the theoretical promise of materially lower rates in 2024 that the market consensus is betting on, the curve dynamics could change the economics of capex and reshoring in timing and in magnitude. That would in turn support Equipment outlays as well as IP Product spending. That is a topic for another day.