U.S. Economy Hit Hard in Q1 But Worse Contraction Still to Come

By Lucia Mutikani | April 29, 2020

The U.S. economy contracted in the first quarter at its sharpest pace since the Great Recession as stringent measures to slow the spread of the novel coronavirus almost shut down the country, ending the longest expansion in the nation’s history.

The decline in gross domestic product (GDP) reflected a plunge in economic activity in the last two weeks of March, which saw millions of Americans seeking unemployment benefits. The Commerce Department’s snapshot of first-quarter GDP on Wednesday reinforced analysts’ predictions that the economy was already in a deep recession.

“The economy will continue to fall until the country opens back up,” said Chris Rupkey, chief economist at MUFG in New York. “If the economy fell this hard in the first quarter, with less than a month of pandemic lockdown for most states, don’t ask how far it will crater in the second quarter.”

Gross domestic product declined at a 4.8% annualized rate last quarter, weighed down by sharp decreases in consumer spending and a drawdown of inventory at businesses. That was the steepest pace of contraction in GDP since the fourth quarter of 2008. A deepening downturn in investment by businesses was another major factor in the slump last quarter, helping to overshadow positive news from a shrinking import bill, the housing market and more spending by the government.

Economists polled by Reuters had forecast GDP falling at a 4.0% rate last quarter, though estimates were as low as a 15.0% pace. The economy grew at a 2.1% rate in the fourth quarter.

Unable to Quantify

The Commerce Department’s Bureau of Economic Analysis (BEA)said that it could not quantify the full effects of the pandemic, but that the virus had partly contributed to the decline in GDP in the first quarter.

Amid Unemployment Surge, Millions of Remote and ‘Essential’ Workers Plug Away

The BEA said “stay-at-home” orders in March had “led to rapid changes in demand, as businesses and schools switched to remote work or canceled operations, and consumers canceled, restricted, or redirected their spending.”

Many factories and nonessential businesses like restaurants and other social venues were shuttered or operated below capacity amid nationwide lockdowns to control the spread of COVID-19, the potentially lethal respiratory illness caused by the virus. The sharp contraction in GDP, together with record unemployment, could pile pressure on states and local governments to reopen their economies.

It could also spell more trouble for President Donald Trump following criticism of the White House’s initial slow response to the pandemic, as he seeks re-election in November. Confirmed U.S. COVID-19 infections have topped one million, according to a Johns Hopkins University tally.

U.S. stock index futures shrugged off the GDP report, rising after Gilead Sciences said its experimental antiviral drug met the main goal of a trial testing it in COVID-19 patients. The dollar fell against a basket of currencies, while U.S. Treasury prices were mixed.

The U.S. Congress has approved a fiscal package of around $3 trillion and the Federal Reserve has cut interest rates to near zero and greatly expanded its role as banker of last resort, but economists say these measures are inadequate. Fed officials were wrapping up a two-day policy meeting on Wednesday.

Consumer Spending Collapse

Economists also did not believe that reopening regional economies, as some states are now doing, would quickly return the broader economy to pre-pandemic levels, which they said would take years. Reopening the economy also involves the risk of a second wave of infections and further lockdowns.

Economists expect an even sharper contraction in GDP in the second quarter and believe the economy entered recession in the second half of March when the social distancing measures took effect.

The National Bureau of Economic Research, the private research institute regarded as the arbiter of U.S. recessions, does not define a recession as two consecutive quarters of decline in real GDP, as is the rule of thumb in many countries. Instead, it looks for a drop in activity, spread across the economy and lasting more than a few months.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, tumbled at a 7.6% rate in the first quarter, the sharpest decline since the fourth quarter of 1980, as demand for both goods and services plummeted. Consumer spending grew at a 1.8% pace in the October-December period.

The other components of GDP were equally weak last quarter.

Inventories Decrease

While declining imports helped narrow the trade deficit and contributed 1.30 percentage points to GDP last quarter, that meant no inventory was accumulated. Inventories decreased at a $16.3 billion rate in the first quarter after increasing at a $13.1 billion pace in the fourth quarter.

Business investment contracted for a fourth straight quarter, pulled down by declines in spending on equipment and nonresidential structures such as mining exploration, shafts and wells. Business investment was already pressured by the Trump administration’s trade war with China, cheaper oil and problems at Boeing.

While the housing market accelerated last quarter, momentum appears to have fizzled in March. Government spending grew moderately.

Most economists have dismissed the idea of a quick and sharp rebound, or V-shaped recovery, arguing that many small businesses will disappear. They also predicted some of the about 26.5 million people who have filed for unemployment benefits since mid-March are unlikely to find jobs.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)

Topics USA

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Latest Comments

  • May 10, 2020 at 5:43 pm
    Ron says:
    Economy will be in turmoil for over a year at least. Tourism will be next to ZERO. Imagine places like Disney, Wildwood, Virginia Beach and the list goes on. I was planning a ... read more
  • April 30, 2020 at 1:09 pm
    Captain Planet says:
    "It could also spell more trouble for President Donald Trump following criticism of the White House’s initial slow response to the pandemic..." Slow response? That is the un... read more

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