US: Economy looks healthy… and resilient – UOB

The advance estimate of the 2Q 2023 GDP surprised on the upside with a 2.4% q/q SAAR expansion thanks to resilient consumption and a strong boost of business spending (vs Bloomberg est 1.8% q/q SAAR and UOB est 1.6%, but was exactly in line with Atlanta Fed’s GDPNow estimate), accelerating from 2.0% in 1Q. Compared to one year ago, the US GDP grew by 2.6% y/y in 2Q, from 1.8% in 1Q. 

The flipside of the still hot US economy is that it should keep the Fed thinking about further tightening to keep inflation at bay. That said, according to trading in futures data compiled by Bloomberg (WIRP) (as of 28 Jul), the probability of a 25-bps rate hike in Sep FOMC stayed at a low 20% (unchanged from 27 Jul, and a tad lower from 21.5% on 26 Jul before the GDP release). 

US GDP Outlook – US 1H GDP expansion has exceeded our projections, and as we alluded to our previous reports, while we continue to factor in a downward shift in US growth trajectory, we are no longer factoring an outright US GDP contraction and instead we are projecting a US growth slowdown in 2H 2023 (amounting to a soft landing). We still expect the lagged effects of US monetary policy tightening and tighter financial/credit conditions to slow the US economy but we are shifting our 2023 US GDP growth forecast higher to 1.2% (from 0.8% previously) to account for the stronger 1H growth outturn and shallower 2H trajectory, which is a reflection of our overestimation of the monetary policy’s drag on near-term growth and underestimation of the resilience of the US labour market. That said, we are lowering our 2024 GDP growth forecast further to 1.0% (from 1.2% previously) to account for the lagged effect of US monetary policy.