U.S. Economy Shrank at 4.8% Pace in First Quarter

Date: Wednesday, April 29, 2020
Source: The Wall Street Journal

Gross domestic product recorded steepest contraction since the last recession

The U.S. economy in the first quarter shrank at its fastest pace since the last recession as the coronavirus pandemic shut down large parts of the country, signaling the end of the longest economic expansion on record.

Gross domestic product, the broadest measure of goods and services produced across the economy, contracted at a seasonally and inflation adjusted annual rate of 4.8% in the first three months, the Commerce Department said Wednesday. The decline marks the beginning of a near-certain recession, economists say, and is the biggest drop in quarterly economic output since the fourth quarter of 2008.

The Federal Reserve separately on Wednesday pledged to use “its full range of tools to support the U.S. economy in this challenging time,” according to a statement released after a rate-setting meeting where it left interest rates near zero and didn’t announce any new policy measures.

Federal Chairman Jerome Powell said the U.S. economy would need additional spending from Congress and the White House to ensure that a robust recovery could take hold following a broad and deep deterioration from the pandemic. Congress and President Trump already have provided more than $2.6 trillion in several economic assistance measures over the last two months.

Stocks rose on the hopes of progress for a coronavirus treatment and the Fed’s pledge to maintain support for an eventual recovery. Mr. Powell said the central bank “is going to be very patient, we’re not going to be in any hurry to move rates up.”

Efforts to contain the coronavirus have brought the economy to a near halt for around seven weeks now. That has sent some sectors, such as restaurants and tourism, into a tailspin.

Some states are beginning to open up their economies, but economic activity remains well below pre-virus levels.

Forecasters expect a much larger contraction in the second quarter, producing the two consecutive quarters of decline that commonly define a recession. Most economists expect a rebound in the second half of the year.

“The weakness was only in the last three weeks of March so there’s a lot more to come,” said James Sweeney, chief economist at Credit Suisse, adding that “we are headed for the largest contraction in GDP since the Great Depression.”

Data company IHS Markit expects GDP to decline at a 37% annual rate from April to June, which would represent the biggest drop since quarterly records began in 1947.

The GDP report reflected the early impact of widespread disruptions in the U.S. economy caused by business and school shutdowns, social distancing and other initiatives aimed at containing the virus. These responses to the pandemic started in the final weeks of the first quarter, and were an abrupt shift from steady economic activity before the virus arrived on U.S. shores.

Layoffs have skyrocketed since the pandemic started, with many analysts expecting the Labor Department to announce next week that the unemployment rate in April hit double-digits for the first time in over a decade. The number of American workers filing new claims for jobless benefits since mid-March has hit more than 26 million.

Larry Kudlow, the top White House economic adviser, in an event with the president and business executives on Wednesday said the economic contraction was “going to go on for a bit” but predicted there would be a “growing, recovering economy” by this summer.

Wednesday’s GDP numbers came amid negative news from major U.S. manufacturersand shaky demand for consumer staples from companies like PepsiCo Inc. and Coca-Cola Co.

Starbucks Corp. logged its first quarterly drop in global same-store sales in nearly 11 years in the previous quarter as a result of the coronavirus crisis. The coffee giant said Tuesday that it expects the impact of the pandemic to be even larger in its current quarter.

Personal consumption, the economy’s bulwark, fell at a 7.6% rate, the steepest drop since the second quarter of 1980. Spending on services—from haircuts to legal advice—accounts for nearly half of total GDP. It fell at a seasonally adjusted annual rate of 10.2%, the largest decline since the agency began compiling quarterly statistics in 1947, led by a decrease in health care services.

Goods spending fell by 1.3%, as lower spending on new cars was offset by stockpiling on items such as food and household essentials as people stocked up for the pandemic.

Business spending on software, research and development, equipment and structures fell at an 8.6% annual rate. Capital spending has been the economy’s weak spot for four straight quarters, after last year’s trade tensions and low oil prices prompted businesses to shy from investing.

Foreigners cut their purchases of U.S. exports, but imports fell even more.

The housing sector was a boon to the economy as residential investment rose at a 21% annual pace. The boost likely reflected lower short-term interest rates and mild weather propelling construction and improvements early in the quarter.

In a sign of consumer caution, the personal saving rate was 9.6% in the first quarter, up from 7.6% in the fourth quarter. The coronavirus pandemic prompted a record souring of consumers’ views on the U.S. economy in April sentiment surveys, but people remain hopeful the gloom will be short-term.

While most economists are expecting a massive drop-off in economic activity in the second quarter, they say the impact of the coronavirus shutdowns should be cushioned by the stimulus package passed last month to mitigate the economic devastation wrought by the novel coronavirus pandemic, which provides financial assistance to U.S. households and businesses.

Vacations To Go, a travel agency that specializes in cruises, was coming off its best year ever in 2019 until “the floor fell out” in February as coronavirus outbreaks on cruise ships dealt a punishing blow to the industry, Chief Executive Emerson Hankamer said.

“As news grew, our business began to wane,” he said. The Houston-based company had 950 employees before the coronavirus pandemic, a number that has dropped to about 200.

“We’re hoping it’s a furlough, but there’s not a lot of clarity,” he said, “There’s a little bit of new business, but most of it is taking care of cancellations or rebooking.”

Headed into 2020, Paul Feder, 34 years old, said he could tell his local economy was booming because the waterfront houses on Lake St. Clair in his hometown of Grosse Pointe, Mich., went big in decorating their homes with Christmas lights.

“You could just tell that more people were feeling it,” he said, referring to the strong economy in the Detroit suburb.

Mr. Feder was in the second round of interviews for his dream job as a business developer at an online retailer. Now the company he hoped to work for has implemented a hiring freeze, and Mr. Feder expects to lose his current job as a digital-marketing manager.

“It’s a roller coaster, every single day,” he said. “It’s just a lot of uncertainty and very difficult to map out what the future holds.”


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