USA TODAY International Edition
Economy sees biggest drop since ’ 08
GDP falls 4.8% in first quarter; Fed promises more action to lessen fallout
The U. S. economy, largely shut down by the coronavirus pandemic, turned in its worst performance in more than a decade in the first quarter, but the dismal showing reflects just a sliver of the damage to come.
The Federal Reserve, meanwhile, vowed to take further aggressive action to mitigate the fallout, and stocks rose despite the bleak report as hopes for a possible COVID- 19 treatment created optimism among investors.
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 almost certainly is already mired in a deep – though likely short – recession, hastily ending the record 101⁄ 2- year- old expansion.
The economy was performing solidly in the first quarter until mid- March,
when most states began closing down nonessential businesses such as restaurants, malls, movie theaters and sports venues 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 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.
“It’s such an extraordinary shock, unlike anything that’s happened in my lifetime,” Fed Chair Jerome Powell said Wednesday at a virtual news conference. “It’s clear the effects on the economy are severe.”
Consumer spending, which makes up about 70% of economic activity, sustained the biggest blow, tumbling 7.6% — the biggest drop in 40 years. 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 consumer confidence, which can foreshadow spending, fell sharply April to the lowest level since 2014, the Conference Board said Tuesday.
Business investment fell 8.6%, marking the first time since 2009 such outlays have dropped four straight quarters. Companies already were restraining their spending amid President Donald 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. The oil price rash also has led producers to shut down drilling rigs.
Residential investment was a bright spot, with construction of single- family homes and apartments, along with renovations, surging 21% and capping three quarters of gains after a prolonged slump. Average 30- year fixed mortgage rates have fallen to 3.3% from 4.2% a year ago, sparking home purchases and construction. That has helped offset a shortage of labor and lots that have constrained builders.
But homebuilding has taken a hit because of the pandemic and is expected to continue to suffer.
Most of the economic distress is playing out in the current 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 climb up to 20% in April, Moody’s predicts, the highest since the Great Depression.
“These data capture only the squall before the second quarter hurricane,” says economist Ian Shepherdson of Pantheon Macroeconomics.
Economic output is expected to shrink at a 24.5% annual rate during the April- June period, according to economists surveyed by Wolters Kluwer’s Blue Chip Economic Indicators. Research firms such as Nomura expect upwards of a 40% drop, the largest in modern history.
Congress has passed about $ 3 trillion in programs to minimize the damage. Among other measures, lawmakers have boosted unemployment benefits and eligibility and offered businesses with fewer than 500 employees forgivable loans that cover eight weeks of payroll and other costs.
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 growth of about 7.5% in the second half the year and 3.8% in 2021. Even so, many consumers are likely to remain wary and avoid public gathering spots until a vaccine is available, perhaps in a year or so. The economists surveyed don’t believe the economy will return to its pre- pandemic level until late 2021.
The Fed, meanwhile, is trying to limit the casualties. On Wednesday, it held its key interest rate near zero and vowed to continue taking forceful steps to combat the effects of the pandemic.
Although the central bank has emptied much of its arsenal to prop up a reeling economy, Powell said, “We can continue to be part of the answer. Will there be a need to do more? I would say yes. ... Our credit facilities are wide open.”
Congress has set aside $ 454 billion for the Treasury that the Fed can use for additional lending programs. The Fed has used less than half of that money, which can be leveraged to a far greater amount in loans.
The Fed reiterated its pledge to keep rates at a range of zero to 0.25% “until it is confident that the economy has weathered recent events and is on track to achieve its” employment and inflation goals. Fed policymakers also said they’ll continue to buy Treasury and mortgage bonds “in the amounts needed” to support ailing financial markets.
Powell would not specify how long the Fed will keep rates near zero but said, “We’re going to wait until the economy is well on the road to recovery” before nudging rates higher. “
Goldman Sachs doesn’t expect the Fed to raise interest rates again until late 2023.
The Fed downgraded its economic outlook in stark terms.
“The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world,” it said. “The virus and the measures taken to protect public health are inducing sharp declines in economic activity and a surge in job losses.”
Weak demand and lower oil prices also have put further downward pressure on inflation, the Fed added, allowing policymakers to keep rates low.
The central bank also has taken rapid- fire steps to provide financing for distressed lending markets, including corporate bonds; small and midsize businesses; student, auto and credit card loans; money market mutual funds; and states and cities.
Powell said he worries most about long- term damage to the economy, such as extended unemployment and business bankruptcies.
“A person can lose skills that are needed, lose touch with the labor force and have a difficult time restarting his or her career,” he said.
He added that minorities and other lower- income Americans who have made the greatest strides during the expansion are most vulnerable to setbacks. “It’s heartbreaking to see all of that threatened now,” he said.