United States: Economy contracts at sharpest rate in over a decade in the first quarter
April 29, 2020
The economy shrank at the sharpest rate since Q4 2008 in the first quarter as the pandemic and measures to contain it hammered activity. The economy contracted 4.8% in Q1 in seasonally-adjusted annualized terms (SAAR), according to an advance GDP estimate released by the Bureau of Economic Analysis. On the heels of the 2.1% expansion registered in Q4 2019, the contraction was even worse than market expectations of a softer 3.5% drop and marked an abrupt end to the longest run of economic expansion in U.S. history. In annual terms, GDP grew 0.3% in Q1, decelerating from Q4’s 2.3% growth.
The largest drag on the economy in Q1 came from private consumption, which plunged 7.6% SAAR amid social distancing measures, falling consumer confidence and mass layoffs, which began in earnest in March (Q4: +1.8% SAAR). Consumer spending on durable goods and services were particularly hard hit in the quarter. Moreover, the downturn in business investment, which has been underway since the second half of last year, intensified significantly (Q1: -8.6% SAAR; Q4: -2.4% SAAR) on a marked drop in equipment investment. Moreover, public outlays moderated in the quarter (Q1: +0.7% SAAR; Q4: +2.5% SAAR) on weaker defense spending and state and local expenditure, while falling private inventories shaved off 0.5 percentage points from headline GDP (Q4: -1.0 percentage point). On the upside, residential investment growth surged to an over seven-year high in Q1.
Turning to the external sector, growth in exports of goods and services contracted 8.7% in the first quarter (Q4: +2.1% SAAR), led by a freefall in exports of services, while goods exports fell at a softer rate. That said, imports of goods and services shrank at the sharpest rate since Q2 2009, leading the external sector to contribute 1.3 percentage points to the headline figure (Q4: +1.5 percentage points).
The first quarter’s contraction is likely just the tip of the iceberg in terms of gauging the economic impact of the pandemic. While an unprecedented synchronized fiscal and monetary stimulus drive should soften the blow, FocusEconomics panelists project the economy to contract in Q2 at the sharpest rate since the Great Depression. Extensive damage to the labor market, with over 26 million Americans having filed for unemployment benefits in the five weeks ending 18 April, paired with the lockdown of large portions of the economy, will push the economy into a deep recession.
Looking further ahead, economic activity should rebound in H2 as restrictions ease and businesses flicker back to life. Nevertheless, a V-shaped recovery is likely out of the question. James Knightley, chief economist at ING, noted: “the legacy of the crisis and the potential for long term structural changes mean at best we currently think the lost output in 1Q and 2Q won’t be fully regained until late 2022.”
Author: Lindsey Ice, Economist