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 U.S. history. The GDP declined by a 4.8% annualized rate reflecting a plunge in economic activity in the last two weeks of March, which saw millions of Americans seeking unemployment benefits. The rapid decline in GDP reinforced analysts’ predictions that the economy was already in a deep recession and left economists bracing for a record slump in output in the second quarter.

Measures taken to stop the spread of COVID-19 have caused a collapse in spending on health care as dentists’ offices closed and hospitals delayed elective surgeries and non-emergency visits. Households also drastically cut back on purchases of motor vehicles, furniture, clothing and footwear. Receipts for transportation, hotel accommodation and restaurant services also plunged.

Businesses further tightened their purse strings and liquidated inventory, 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% rate last quarter. The economy, which grew at a 2.1% rate in the fourth quarter, was in its 11th year of expansion, the longest on record.

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, with estimates for a drop as large as a 40%-per-cent pace. “The next few months will be extremely difficult for the U.S. economy, with a historic contraction in GDP in the second quarter,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh. “If consumers and workers remain housebound into the third quarter, or if the pandemic fades and then re-emerges, the recession could last throughout 2020.”

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, tumbled at a 7.5% rate in the first quarter, the sharpest drop since the second quarter of 1980, after growing at a 1.8% pace in the October-December period. The Commerce Department said that the spending plunge was accompanied by a sharp 2% drop in personal incomes in March.      

Imports shrunk at a 15.3%, the largest decline since the second quarter of 2009, leading to a narrower trade deficit, which contributed 1.30 percentage points to GDP last quarter. But that meant no inventory was accumulated, with stocks at businesses decreasing at a US$16.3-billion rate after increasing at a US$13.1-billion pace in the fourth quarter.

Business investment contracted at an 8.6% rate, the sharpest since the second quarter of 2009. That marked the fourth straight quarterly drop in investment. Spending on non-residential structures such as mining exploration, shafts and wells also tanked. Business investment was already stressed by the Trump administration’s trade war with China, cheaper oil and problems at Boeing.

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.

“The legacy of the crisis and the potential for long-term structural changes mean at best we currently think the lost output in first and second quarter won’t be fully regained until late 2022,” said James Knightley, chief international economist at ING in New York.

Source: Forbes
Source: USA Today
Source: Globe & Mail