Q1 GDP Shrinks By Most Since Great Recession, But That’s Not the Bad News
An initial reading of first quarter GDP is out today, and the numbers are not good. The United States economy tanked by 4.8% annualized in the period from January to March, worse than expected. This marks the biggest drop in GDP since the fourth quarter of 2008, during the Great Recession, and the first economic contraction since 2014. Prior to this quarter, the economy had experienced the longest recovery on record, snapping back after the financial crisis of 2008-2009. Now, a recession (technically two quarters in a row of negative GDP growth) is all but guaranteed.
Fallout from the financial crisis caused economic growth to decline for five quarters between 2008 and 2009. The economy bottomed out at 8.4% annualized losses in the fourth quarter of 2008. Things turned around afterward, with GDP improving nearly every quarter for the next 11 years. GDP shrunk in 2011 on gas prices and inflation, and again in 2014 as the polar vortex (remember that?) caused activity to slow.
Those contractions were mild compared to what faces us today. Inessential store closures took a big bite out of the economy. Consumption (which makes up roughly two-thirds of economic activity) fell by 7.6%, taking its biggest hit since 1980. Durable goods dropped by 16.1% while services slumped by 10.2%.
Of course, these numbers go hand in hand with unemployment. The Department of Labor announced last week that unemployment claims skyrocketed to 26 million over the previous five weeks. In comparison, 22 million jobs were created throughout the recovery. Unemployment rose to 11% of the workforce, setting a new record. White House advisors believe this number could climb to 20% in the second quarter. In comparison, unemployment peaked at 24.9% during the Great Depression in 1933.
Imports and exports both suffered during the quarter. Imports slumped by 15.3% and exports declined by 8.7%, a fall not seen since 1975. Business investment and inventories also dragged on GDP.
Interestingly, healthcare was one sector that particularly struggled. As hospitals shifted focus from lucrative elective procedures to treating patients infected with the coronavirus, revenues decreased by billions. Health care contributed to nearly one half of GDP decline.
But none of that is the bad news. The GDP estimate that was just released is a first pass. Data was harder to collect during the quarter, and the reading will likely be worse once initial figures are revised.
It gets worse still. Full force shelter in place orders took hold beginning in mid-March. This means that the economic slump announced today is primarily the result of two weeks of inactivity. Facing at least a full month of stay at home orders, Q2 GDP is all but certain to be much worse. Right now, economists are estimating a Q2 contraction anywhere between 25-40%, although the final number could be anyone’s guess at this point. According to a statement from the Bureau of Economic Analysis, ‘The decline in first quarter GDP was, in part, due to the response to the spread of COVID-19, as governments issued “stay-at-home” orders in March. This led to rapid changes in demand, as businesses and schools switched to remote work or canceled operations, and consumers canceled, restricted, or redirected their spending.’
