- The American economy shrank by 4.8% annualized in the first quarter of 2020 – the biggest decline since the Great Recession (Q4 2008 when GDP fell by 8.4% annualized). That came in a bit worse than the 4% drop markets were expecting.
- The advance estimate of GDP is based on source data that are incomplete, and using the typical estimation methods would not have captured the late-quarter impact of COVID-19. In light of this the Bureau of Economic Analysis opted to use new techniques to fill in data gaps, including private high-frequency credit card transactions, unemployment claims data to identify late-period declines in business production and compensation, and information on the timing of state-mandated school closures that impacted government spending. However, the BEA also stated that the full economic effects of “stay-at-home” orders cannot be fully quantified in the GDP estimate.
- Personal consumption expenditures fell by 7.6% annualized, led by a 16.1% drop in durable goods and a 10.2% drop in services. The durable goods decline was largely due to a decline in motor vehicles and parts. In contrast, spending on nondurable goods jumped 6.9%, reflecting stockpiling activity.
- Non-residential fixed investment fell 8.6%, led by a 15.6% drop in equipment spending. Nonresidential structures, which includes spending on oil shafts and wells fell 8.6%. As usual, investment in intellectual property bucked the trend, managing to hold on to a sliver of a gain at +0.4%.
- Due to an unseasonably warm winter across much of the country, residential construction was on a tear to start the year, and COVID-19 shutdowns were not enough to prevent a 21% jump in residential investment. This was driven largely by single-family home construction.
- Government spending was up a modest 0.7% led by activity in federal nondefense spending, which rose 3.1%. Spending at the state and local level rose only 0.1%, held back by school closures at the end of the quarter.
- A drawdown in inventories subtracted 0.5 percentage points on the quarter. In a normal quarter this would be substantial, but is less material with activity down so significantly.
- International trade fell substantially in Q1. Exports fell 8.7% and imports fell and even larger 15.3%. The COVID-19 outbreak in China earlier in the quarter shut down much of its manufacturing sector, and would have reduced shipments to the U.S. Notably, services imports and exports were both down over 20% annualized on the quarter, and include travel-related spending, which came to an abrupt halt earlier than the stay-at-home orders. Overall net exports added 1.3 percentage points to headline GDP.
- Real personal disposable income was up just 0.5% in the first quarter, but with the shutdowns keeping Americans from spending money, the personal saving rate rose to 9.6%, up from 7.6% in the fourth quarter of 2019.
Key Implications
- The longest economic expansion in U.S. history came to an end in the first quarter due to the COVID-19 pandemic. It is testament to how wide and abrupt the shutdowns were that coming in the last few weeks of the quarter were enough to send the economy into a material contraction.
- The second quarter is likely to show an eyepopping contraction on a quarterly basis, roughly 40% annualized. However, given the nature of the shock, annualizing quarterly data can be misleading. It is usually used to provide a sense of the economic ‘run rate’ in a given quarter. But, we do not expect this shock to persist meaningfully beyond the quarter, so it may be more accurate to say that COVID-19 is expected to wipe about 13% from economic activity as compared to the end of 2019 (see latest forecast update).
- With signs that the pandemic is easing in some regions of the country, states have turned their attention to how to start lifting the shutdowns. Our latest forecast assumed this process gets underway in the latter half of the second quarter and leads to a roughly 25% annualized jump in activity in Q3. However, there is high degree of uncertainty given that growth is highly dependent on the pace of re-opening and continued success in limiting the spread of the virus.
