Economy shrank 4.8% in Q1 as pandemic shuttered businesses

Economy shrank 4.8% in Q1 as pandemic shuttered businesses

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AP Domestic

The U.S. economy, largely shut down by the coronavirus pandemic, turned in its worst performance in more than a decade early this year but the dismal showing reflects just a sliver of the damage to come.

The nation’s gross domestic product, the value of all goods and services produced in the U.S., contracted at a seasonally adjusted annual rate of 4.8% in the January-March period as both consumer and business spending fell sharply, the Commerce Department said Wednesday. It marked the first drop in output since early 2014 and the steepest since late 2008 during the depths of the Great Recession.

Economists surveyed by Bloomberg had forecast a 3.8% decline in GDP.

The country is already mired in a deep – though likely short – recession.

The first-quarter contraction likely reflects only part of the actual slide because initial estimates typically miss some data and such gaps are accentuated during big economic shifts, Goldman Sachs says. Also, the firm says, many businesses were closed and couldn’t be surveyed.

The economy was performing solidly in the first quarter until most states began closing down nonessential businesses such as restaurants, movie theaters, sports venues and most stores in mid-March to curtail the spread of the virus. The closures compounded the pain reverberating through a travel industry that had come to a near standstill as Americans shunned airplane flights and hotel stays.

Moody’s Analytics estimates that about 30% of America’s economy is shuttered.

About 10 million Americans in industries affected both directly and indirectly lost their jobs in March, further dampening consumer spending in the first quarter.

By May, as many as 25 million Americans will have been laid off and another 20 million or so will see reductions in hours or wages, Moody’s estimates. The unemployment rate, which rose from a half-century low of 3.5% in February to 4.4% in March, is expected to soar to 15% to 20% in April, Moody’s predicts, the highest since the Great Depression.

As a result, most of the economic fallout from the layoffs and businesses closures is playing out in the current quarter. Economic output is expected to shrink at a 24.5% annual rate in the current quarter, according to economists surveyed by Wolters Kluwer’s Blue Chip Economic Indicators. Research firms such as Nomura expect upwards of a 40% drop, the most since the 19th Century.

Congress has passed about $3 trillion in programs to minimize the damage. Among other measures, lawmakers have boosted unemployment benefits and eligibility, and offered forgivable loans that cover eight weeks of payroll and other costs for businesses with fewer than 500 employees that retain workers. The Federal Reserve also has rolled out a batch of programs to support lending to businesses and households.

Analysts, in turn, expect the economy to begin to rebound by summer, assuming the coronavirus outbreak continues to wane and more states allow businesses to reopen. States such as Georgia, South Carolina and Tennessee already are restarting their economies.

Economists surveyed by Wolters Kluwer expect the economy to grow about 7.5% the second half the year and 3.8% in 2021. Even so, many consumers are expected to remain wary and avoid public gathering spots until a vaccine is available, perhaps in a year or so. The economists surveyed don’t expect the economy to return to its pre-pandemic level until late 2021.

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Consumer spending plunges

Consumer spending tumbled 7.6% after rising 1.8% in the fourth quarter. American shoppers were in good financial shape before the outbreak after whittling down debt and socking away a historically large share of their income.

But the sudden shutdown of most consumer service businesses combined with millions of layoffs has abruptly shriveled purchases. Consumer confidence, which can foreshadow spending, fell sharply April to the lowest level since 2014, the Conference Board said Tuesday.

Consumption makes up about 70% of economic activity.

Business investment declines sharply

Business investment fell 8.6% after a 2.4% decline in the fourth quarter, marking the first time since 2009 such outlays have fallen four straight quarters. Companies already were restraining their spending amid President Trump’s trade war with China last year.

Any increased optimism following the Phase 1 trade deal between the U.S. and China in January has been doused by the pandemic. There’s no reason for businesses to buy new factory equipment and computers to ramp up  production if consumers aren’t spending.

Purchases of such equipment plummeted 15.2% while spending on structures dropped 9.7%, in part because of the crash in oil prices that has prompted producers to shut down drilling rigs.

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