Northwest Arkansas Democrat-Gazette
Growth drops 4.8%; worse expected ahead
U.S. economy takes biggest hit since 2008
The coronavirus pandemic officially snapped the United States’ economic growth streak in the first three months of the year.
The question now is how deep the damage will get — and how long the country will take to recover.
U.S. gross domestic product, the broadest measure of goods and services produced in the economy, fell at a 4.8% annual rate in the first quarter of the year, the Commerce Department said Wednesday. That is the first decline since 2014 and the worst quarterly contraction since 2008, when the country went into a deep recession.
But economists quickly noted that even this decline was likely the tip of the iceberg because the first-quarter number included January and February, and reported coronavirus cases did not begin to surge until March.
Economists expect figures from the current quarter, which will capture the shutdown’s impact more fully, to show that the economy contracted at an annual rate of 30% or more, a scale not seen since the Great Depression.
“They’re going to be the worst in our lifetime,” Dan North, chief economist for the credit insurance company Euler Hermes North America, said of the second-quarter figures. “They’re going to be the worst in the post-World War II era.”
The larger question is what happens after that.
Steven Mnuchin, the Treasury secretary, said this week that he expected the economy to “really bounce back” this summer as states lift stayhome orders and trillions of dollars in federal emergency spending reaches businesses and households.
Most independent economists are much less optimistic. The Congressional Budget Office last week released projections indicating that the economy will begin growing again in the second half of the year but that the gross domestic product won’t return to its pre-pandemic level until 2022 at the earliest.
Two consecutive quarters of negative growth in the gross domestic product — a tally of all goods and services produced in the nation — are usually considered a recession. And the U.S. economy got much worse in April as businesses across the nation shut down, millions of workers were laid off and state governments imposed lockdowns.
More than 26 million Americans have already had to seek unemployment aid.
The estimates issued Wednesday are preliminary and based on incomplete data, particularly for March. The speed of the economic shift means that revisions could be particularly large, and some economists expect final figures, due later this spring, to show an even bigger decline.
SPENDING PLUMMETS
But the data, however incomplete, hinted at the breadth of the damage.
The report showed that the weakness was led by plummeting consumer spending, which accounts for 70% of economic activity. Consumer spending tumbled at an annual rate of 7.6% in the first quarter — its steepest decline since 1980. Business investment, which had already been struggling in part because of the trade war, sank 8.6%, with investment in equipment falling 15.2%.
The pandemic has hit the service sector particularly hard: Restaurants are closed, flights are nearly empty and stadiums have sat unused for weeks. Spending on services fell at a 10.2% rate in the first quarter, and spending at restaurants and hotels was down nearly 30% on an annual basis. Consumers even spent less on health care, as they put off appointments and canceled elective procedures.
Spending on goods fell at a milder 1.3% rate, helped by a surge in spending on groceries as Americans stocked up for the shutdown. But spending on cars plunged at a 33.2% rate. That pattern could hurt the recovery. Consumers who put off buying goods, especially long-lasting items like cars and washing machines, might simply defer those purchases, not skip them. But they are less likely to make up for spending on services the same way — no matter how many haircuts someone misses in quarantine, it takes only one to get back to normal.
NO QUICK RECOVERY
When the new coronavirus began to spread in the United States this year, many economists expected a “V-shaped” recovery, with a sharp downturn followed by an equally swift rebound. But those projections were mostly predicated on a short pause in activity that could be quickly reversed. As lockdowns have stretched into a second month — and with disruptions likely to continue for weeks or months in many states — those hopes have faded.
With each month of unpaid bills and rock-bottom sales, more businesses will go bankrupt or decide not to reopen. More workers will drift away from their employers, turning temporary layoffs into permanent job losses. More loans will lapse into delinquency, endangering banks and the broader financial system.
“The longer things stay shut down, the harder it’s going to be to turn it back on again,” said Tara Sinclair, an economist at George Washington University.
Those consequences have led President Donald Trump and other elected officials — particularly Republican governors in states with relatively few coronavirus cases — to push to reopen the economy as quickly as possible. Several states have started to do so, and others, including large ones such as Texas and Florida, will begin to at the end of the month.
But economists and epidemiologists say moving too quickly threatens both public health and economic growth. The United States is not performing nearly as many coronavirus tests as health officials say are necessary to detect and contain new outbreaks. Until that happens, a robust economic rebound won’t be possible, said Karen Dynan, a Harvard economist who was a Treasury official in President Barack Obama’s administration.
“You could lift the restrictions tomorrow and the economy would still not come back if people don’t feel safe to go out,” she said. As a result, “measures that we normally consider to be public health measures are in this case a really important component of the economic policy response.”
GOVERNMENT STIMULUS
The economy should be getting a lift from the nearly $3 trillion in various relief spending by Congress — including more than $650 billion for small businesses — and trillions more of lending and credit programs orchestrated by the Federal Reserve.
The Fed responded swiftly to the coronavirus outbreak, slashing its benchmark interest rate to near zero in mid-March and announcing lending facilities, including support for budget-strapped states and cities, to limit business failures and job losses.
Hours after the Commerce Department issued its bleak report on the nation’s gross domestic product, the Fed signaled that it would keep its key short-term interest rate near zero for the foreseeable future as part of its extraordinary efforts to bolster the economy.
Concern about the public health situation is complicating the work of economic forecasters and policymakers. The usual tools for stimulating consumer spending and business investment don’t help much when businesses can’t operate and consumers can’t leave the house. Standard economic models can’t predict when a vaccine will become available, or when people will feel comfortable going back to work.
“If we could be told right now with confidence that on X date, whenever X date is, the virus will be gone — if we knew that now, I think businesses could plan accordingly and could make the right calculations,” said Sinclair, the economist. “The problem is that we don’t have that certainty, and there’s no way to have that certainty. There’s no way to promise when we can restart, and that uncertainty is what’s killing our ability to do good economic policy.” Information for this article was contributed by Ben Casselman of The New York Times, by Don Lee of the Los Angeles Times; by Martin Crutsinger of The Associated Press; and by Heather Long of The Washington Post.