What we read from the US Q3 GDP numbers?

On 22nds December, the US Bureau of Economic Analysis (BEA) published the final estimates for Q3 GDP. Normally, the BEA publishes 3 estimates with the third and final estimate being the most reliable. This time around, the GDP estimates have seen consistent upgrades. The first upgrade had pegged the US Q3 GDP growth at 2.6%, which was later upgraded to 2.9% in the second estimate. Now, the third and final estimate has further upgraded the growth to 3.2%. This upgrades mark a turnaround in terms of positive GDP growth and in terms of momentum. For instance, in Q1 and Q2 the US GDP had contracted by -1.6% and -0.6% respectively on a yoy basis. This sort of rules out a recession scenario.

10 key takeaways from the US GDP number for Q3

Here are important takeaways for GDP growth number and what it means for the trajectory of US Fed rates as well as its larger implications for the Indian economy and markets.

1. The real decisive boost to US GDP growth in Q3 was from the growth in private consumer services. It grew at a clip of 4.9%. The major drivers of this growth were information services, scientific services, rentals and leasing. In the services space, there was pressure on utilities and the finance and insurance space.
    

2. While the government still made a positive contribution to the GDP, the irony is that bulk of the positive contribution came from the local and state governments while the Federal government was a dampener to GDP growth. Consumption of private goods were under pressure with pressure visible in the construction space.
    

3. Like in the previous two quarters, trade continues to be the redeeming feature of the GDP growth story for Q3-2022. Trade was a dual booster. While exports of goods and services surged sharply, the trend was also supported by a sharp fall in imports in the same period. Consumption imports took the biggest hit.
    

4. Consumer spending on healthcare and services was a key driver but spending on physical goods continued to be weak and this can be attributed to uncertainty in the economy on recession fears. However, businesses are investing as depicted by the positive traction visible in business investments in equipment and intellectual property.
    

5. The trend of home sales continues to be under pressure. Not only are people wary of committing to long term mortgages but the impact on sectors like cement and construction as well as on building materials as been extremely negative. However, rentals and leasing services continued to remain robust.
    

6. Interestingly, the good GDP numbers would not be a good thing for the markets as it hints at the Fed continuing and reinforcing its hawkish stance. That is one reason, the US markets and also the Indian markets have reacted so negatively to the latest GDP numbers. The Fed is also veering around to the belief that higher rates curtailed inflation and boosted real GDP growth.
    

7. So what is the outlook for the interest rates in the US. Will the Fed continue on its rate raising spree, after the GDP data outcomes. In the US, rates have moved up from the range of 0.00%-0.25% to the latest range of 4.25%-4.50% in 9 months since March 2022. The GDP data would enthuse the Fed to implement 75 bps more of rate hikes, possibly in three tranches in 2023.
    

8. What are the implications for Indian stance and the Indian markets. Let us look at the RBI stance first. RBI is also likely to hold the argument that lower inflation would be growth accretive in long run. Post the US GDP data release, RBI may not relent before another 50 bps rate hike at the very least in the first half of 2023. In other words, the RBI may also be more sold on to the idea of the positive correlation between rates and growth.
    

9. But for Indian economy, there are going to be several positives. The positive effects for India would be in the form of improved demand for Indian exports and also positive traction in tech spending. The US is India’s largest export partner and India runs one of its biggest trade surpluses with the US. Also, tech spending is likely to be a force multiplier for the IT and the outsourcing industry in India.
    

10. Finally, would the US GDP data be positive for the Indian equity markets and how would it really impact the flows from the portfolio investors? As the US economy improves, there is likely to be a calibrated shift to risk-off sentiments among global investors. Emerging markets like India are likely to benefit the most from this shift. More so, considering India would be the only large economy growing at above 6.8% in FY23. In the absence of other shocks, the US GDP data should favour Indian markets.