The US economy shrank in the first quarter by its fastest rate since the 2008 financial crisis, ending the longest expansion on record as lockdowns aimed at curbing the coronavirus pandemic choked off economic activity.
Gross domestic product, or the value of all goods and services produced by the economy, shrank at an 4.8 per cent annualised rate in the first three months of the year, according to the preliminary estimate from the Bureau of Economic Analysis published on Wednesday. That marked the steepest drop since the 8.4 per cent contraction at the end of 2008 and compared with economists’ forecasts for a narrower 4 per cent decline in output.
In a rare statement the BEA identified the economic damage from “stay-at-home” orders issued in March, which it said “led to rapid changes in demand, as businesses and schools switched to remote work or cancelled operations, and consumers cancelled, restricted, or redirected their spending”.
The blow to the American consumer powering the economy was evident in a 7.6 per cent drop in personal consumption data, which marked the biggest decline since 1980.
“Consumers adjusted very rapidly as the lockdowns were put in place,” Michelle Meyer, the head of US economics research at Bank of America, said, noting the sharp declines in spending on restaurants and travel. “Following this Covid shock, the tendency will be to build up savings and there will also be a change in how people spend and how people live.”
Counter intuitively, healthcare was among sectors that suffered the most, as hospitals stopped performing lucrative elective procedures as the focus shifted to tackling the pandemic. Paul Ashworth, economist at Capital Economics, noted it accounted for 40 per cent of the overall decline in consumption. Transportation, recreation, and food services & accommodations all experienced sharp declines as well.
Business investment, already depressed by the US-China trade war last year, fell further for the fourth consecutive quarter, recording the most precipitous decline in 11 years.
While the March quarter GDP figure was buttressed by the strong economy in place before the widespread outbreak of Covid-19, the extent of the collapse caused by the pandemic will become apparent when second quarter data is released, as lockdowns only began in earnest in mid-March. Some economists forecast that the economy could shrink between 30 to 40 per cent in the current quarter.
Kevin Hassett, a top White House economic adviser, on Tuesday said GDP in the second quarter would be a “big negative number”. The former chair of the White House council of economic advisers, who has been called back to help deal with the response to the pandemic, told CNN he believed unemployment would rise to as much as 20 per cent by June — a number that he stressed had not been seen since the Great Depression in the 1930s.
The extent of the economic catastrophe was reinforced last week when the US labour department said 26m Americans had filed jobless claims over the previous five weeks.
Congress has approved roughly $3tn in stimulus spending over the past two months to tackle the economic impact of the pandemic — with measures that range from “economic impact” payments to individuals, to $659bn for small business loans.
Democrats and Republicans have also started informal negotiations on the contours of another big stimulus package to follow on from the record $2.2tn Cares Act that was passed at the end of March.
Mr Hassett on Tuesday said the White House was debating whether to provide another round of stimulus payments to individuals beyond the means-tested $1,200 per person that was included in the initial package. Some Democrats want to go much further by providing monthly payments to Americans for the duration of the crisis.
Nancy Pelosi, the Democratic House speaker, on Monday suggested she might support a “universal basic income”, in a recognition of the dramatic and sustained impact that the crisis is having on Americans.
States are calling on Congress and the administration to provide more funding, partly to deal with the immediate fallout from the crisis, but also to make up revenue shortfalls as tax receipts plummet with the imploding economy. Cities have called for $250bn to help them fund everything from municipal government salaries to rubbish collection.
At the same time, the Federal Reserve unleashed measures — including slashing interest rates, asset purchases, expanded lending facilities and swap lines with foreign central banks — that outstripped its efforts during the 2008 financial crisis.
Those measures have helped fuel hopes of a summer rebound alongside a move by states, across the political divide, to reopen their economies. For US president Donald Trump a strong rebound in GDP and hiring are crucial to his re-election prospects.
Still economists have cautioned against expecting a V-shaped recovery. “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,” James Knightley, economist at ING said.
