U.S. Economy Shrinks at 4.8% Pace, Signaling Start of Recession
It's the first quarterly economic contraction since 2014 and the biggest since 2008.
The record-long U.S. economic expansion is over after almost 11 years, with the deepest recession in at least eight decades now under way.
The world’s largest economy shrank at a 4.8 percent annualized pace in the first quarter, the biggest slide since 2008 and the first contraction since 2014, as the need to fight the coronavirus forced businesses to close and consumers to stay home.
The downturn, reported Wednesday by the Commerce Department, was led by the steepest drop in consumer spending since 1980 and the fastest decline in business investment in almost 11 years. The worse-than-expected report reveals the widescale hit to U.S. output from Covid-19 and the subsequent freezing of economic activity.
The current quarter is likely to be far worse, with analysts expecting the economy to tumble by a record amount, based on data going back to the 1940s. Bloomberg Economics has projected a 37 percent annualized contraction. UniCredit has predicted a 65 percent contraction.
These numbers end an expansion that began in mid-2009 when the economy began to recover from the financial crisis. Since then, gross domestic product (GDP) swelled by $7 trillion and unemployment fell to a five-decade low of 3.5 percent.
The recessionary pain is being felt worldwide, with China already reporting a sharp decline in output and the Eurozone set to deliver grim figures Thursday.
As the U.S. government and states debate when and how fast to lift restrictions on companies and schools, there remains considerable doubt over the duration of the economic slowdown and the shape of the recovery. Early hopes for a rapid rebound have faded, with most analysts assuming that a jump in activity once the virus passes will be followed by a slower resumption of growth. So far, many data points signal a deepening contraction, while others have shown slight improvement, according to a Bloomberg Economics tracker.
Consumers Are Wary
Despite massive government aid packages and near-zero interest rates, businesses big and small risk going bankrupt, while consumers may remain wary of hitting shops and restaurants amid health concerns, higher debt burdens, and job insecurity.
Another big question is how the recession will affect the re-election chances of President Donald Trump, who lately has been pushing for removal of the constraints after losing the ability to run on a strong economy.
At the Federal Reserve, which slashed rates and rolled out a slew of emergency and unprecedented lending programs, Chairman Jerome Powell and colleagues are trying to limit the virus’s damage to jobs and business while setting the conditions for recovery. They conclude a two-day meeting later today, with a statement expected at 2 p.m. in Washington and a press conference by Powell at 2:30 p.m.
While two quarters of contraction is considered by most to constitute a recession, the official call in the United States is made by the Business Cycle Dating Committee, a panel of economists at the National Bureau of Economic Research. They look at a wide range of indicators including consumer spending, employment, and GDP.
The analysis can take a while. In the last recession, which became the longest since World War II, the committee didn’t make the determination for nearly a year after the downturn started.
In any case, the GDP figures underscore what’s already clear from government data showing 26 million Americans filing for unemployment, along with plunges in retail sales and factory production.
The 4.8 percent contraction in first-quarter GDP—the first decline since a 1.1 percent drop in 2014—compared with the median projection for a 4 percent drop in a Bloomberg survey of economists. In January, analysts were forecasting growth of 1.6 percent.
Consumer spending, which had already begun to cool in the second half of 2019, fell at a 7.6 percent rate. Changing consumption habits were evident in the report, as the biggest increase since 2003 in spending on nondurable goods, such as food, was more than offset by the largest slump in purchases of durable goods in more than 11 years.
Consumption is forecast to be much weaker in the second quarter because broader government measures, including closures of restaurants and stores, didn’t start in earnest until mid to late March, and they continue today in much of the United States.
Business investment, already down for three straight quarters as the U.S.-China trade war kept companies guessing, also took a big hit. Companies slowed spending on structures and equipment. Investment in software rose, however, potentially reflecting efforts to help employees work from home.
Exports of services fell by the most since 1975, reflecting a decline in international travelers coming to the U.S.
The first-quarter GDP figures will be revised several times, and some economists broadly expect the reading to become weaker as more data and adjustments are made.
—With assistance from Kristy Scheuble and Sophie Caronello.
From: ThinkAdvisor