U. S. ECONOMY SHRINKS BY 4.8%, Q2 FORECAST IS WORSE.
• The U. S. economy contracted in the first quarter at its sharpest pace since the Great Recession as stringent measures to slow the spread of the novel coronavirus almost shut down the country, ending the longest expansion in the nation’s history.
The drop in gross domestic product ( GDP) reported by the Commerce Department on Wednesday reflected a plunge in economic activity in the last two weeks of March, which saw millions of Americans seeking unemployment benefits. The rapid decline in GDP reinforced analysts’ predictions that the economy was already in a deep recession and left economists bracing for a record slump in output in the second quarter.
“If the economy fell this hard in the first quarter, with less than a month of pandemic lockdown for most states. Don’t ask how far it will crater in the second quarter because it is going to be a complete disaster,” said Chris Rupkey, chief economist at MUFG in New York.
Gross domestic product declined at a 4.8 per cent annualized rate last quarter, weighed down by a collapse in spending on health care as dentists’ offices closed and hospitals delayed elective surgeries and non-emergency visits to focus on patients suffering from COVID-19, the potentially lethal respiratory illness caused by the virus.
That was the steepest pace of contraction in GDP since the fourth quarter of 2008. Households also drastically cut back on purchases of motor vehicles, furniture, clothing and footwear. Receipts for transportation, hotel accommodation and restaurant services also plunged.
Businesses further tightened their purse strings and liquidated inventory, helping to overshadow positive news from a shrinking import bill, the housing market and more spending by the government. Economists polled by Reuters had forecast GDP falling at a 4.0 per cent rate last quarter. The economy, which grew at a 2.1 per cent rate in the fourth quarter, was in its 11th year of expansion, the longest on record.
The Commerce Department’s Bureau of Economic Analysis ( BEA) said while it could not quantify the full effects of the pandemic, COVID-19 had partly contributed to the decline in GDP in the first quarter. The BEA said “stay- at- home” orders in March had “led to rapid changes in demand, as businesses and schools switched to remote work or cancelled operations, and consumers cancelled, restricted, or redirected their spending.”
Many factories and non- essential businesses like restaurants and other social venues were shuttered or operated below capacity amid nationwide lockdowns to control the spread of COVID-19. The sharp contraction in GDP, together with record unemployment, could pile pressure on states to reopen their economies.
It also deprives President Donald Trump of a success story to campaign around as he seeks re- election in November, and could ramp up criticism of the White House’s initial slow response to the pandemic. Confirmed U. S. COVID- 19 infections have topped one million, according to a Johns Hopkins University tally.
The U. S. Congress has approved a package of around US$ 3 trillion and the Federal Reserve has cut interest rates to near zero, but economists say these measures are inadequate. Fed officials were ending a two-day policy meeting on Wednesday.