US economy shrinks at 5.0% rate in Q1; worse is likely on the way

Consumer spending up 8.2%, partly erasing record plunge

WASHINGTON, June 27, (AP): The US economy shrank at a 5.0% rate in the first quarter and a vastly worse performance is expected in the current threemonth period, when the coronavirus pandemic began to spread across the US.

The Commerce Department reported Thursday that the decline in the gross domestic product, the total output of goods and services, in the January-March quarter was unchanged from the estimate made a month ago.

It was the sharpest quarterly decline since an 8.4% tumble in the fourth quarter of 2008 during the depths of the worst financial crisis since the Great Depression.

The first quarter period captured just two weeks of the shutdowns that began in many parts of the country in midMarch.

Economists believe that GDP has plunged around 30% from April through the end of this month.

That would be the biggest quarterly decline on record by a long shot: Three times bigger than a 10% drop in the first quarter of 1958.

Rebound

Forecasters believe the economy will rebound in the second half of the year. The Congressional Budget Office is predicting a 21.5% growth rate in the upcoming July-September quarter followed by a 10.4% gain in the fourth quarter.

However, a handful of states, particularly in the South, have begun to report surging infections. And even if a rebound materializes in July, it will follow seismic losses that would mean a decline in economic output for the entire year.

While overall GDP was unchanged for the first quarter, the composition shifted slightly with downward revisions to consumer spending, exports and business inventories offset by an upward revision to business investment.

The Thursday report was the government’s third and final look at first quarter GDP.

The panel of economists that determines when US recessions begin said that February marked the end of the longest economic expansion in US history, 128 months of uninterrupted growth that began in the wake of the 2008 financial crisis.

President Donald Trump has declared that the economy will come roaring back with a V-shaped recovery starting this summer. Larry Kudlow, the president’s chief economics adviser, said on Thursday that even with the resurgence in COVID-19 cases, the administration is still looking for a strong recovery in the second half of this year.

“I think the strong V-recovery is still right there,” Kudlow said in an interview on the Fox Business Network. Kudlow predicted GDP will rise at a 20% annual rate in the third quarter and the fourth quarter and then rise by 5% in the first quarter, which he said would recoup all of the GDP losses in the first half of this year.

Economists are nowhere near that optimistic. They are worried about the devastating impact of a second wave of infections and think it will take a couple of years to get back the lost GDP output.

“The foundation to this recovery is an improving health outlook,” said Lydia Bousur, senior US economist at Oxford Economics. “Amid rapidly rising infections across many states, risks to the outlook are dangerously tilted to the downside.”

Financial markets took a sharp nosedive Wednesday, reflecting new worries about reports of rising coronavirus cases in many states. They rose moderately Thursday.

“I can’t remember the economy facing this much uncertainty,” said Sung Won Sohn, a business and economics professor at Loyola Marymount University in Los Angeles. He said that until a vaccine is found and widely available, the high uncertainty can be expected to last.

Recession

Mark Zandi, chief economist at Moody’s Analytics, said for the country to avoid a double-dip recession, an effective vaccine needs to be available next year and new waves of coronavirus cases will need to do less damage than the first wave. Congress needs to soon pass another package of at least $1 trillion in further support for laid-off workers and struggling businesses, Zandi said.

“If any of these three things don’t happen, then the outlook is much darker,” Zandi said. “I think we are in a recovery mode right now but the economy is very fragile.”

Meanwhile, American consumers increased their spending by a record 8.2% in May, partly erasing record plunges the previous two months, against the backdrop of an economy that’s likely shrinking by its steepest pace on record this quarter.

Last month’s rebound in consumer spending followed spending drops of 6.6% in March and 12.6% in April, when the viral pandemic shuttered businesses, forced millions of layoffs and sent the economy into a recession. Since then, many businesses have reopened, drawing consumers back into shops and restaurants and restoring some lost jobs.

Friday’s Commerce Department report showed that Americans stepped up their spending in May despite a 4.2% decline in personal income, which had soared by 10.8% the previous month. Income had jumped in April on the strength of billions of dollars in support through government payments in the form of unemployment aid as well as one-time $1,200 stimulus checks. In May, those stimulus checks were no longer counted as income for most people.

Besides whatever unemployment aid states are providing to the 30 million jobless Americans, the federal government is providing $600 a week in additional benefits. The federal money has pumped nearly $20 billion a week into the economy and enabled many of the unemployed to stay afloat. But the $600 a week in aid will expire after July, and Trump administration officials have said they oppose an extension.

Without the stimulus checks or an extension of unemployment aid, it’s unclear whether consumers will keep spending freely. In testimony to Congress last week, Federal Reserve Jerome Powell said he thought lawmakers should consider providing some form of extended unemployment benefits beyond their typical six-month period, on the assumption that joblessness will likely still be quite high by year’s end.

Last month’s rise in consumer spending also coincides with a sudden surge in coronavirus cases that’s forcing states and businesses to consider scaling back or even reversing the re-openings. If an escalation of the pandemic does force another round of widespread business shutdowns, fewer people would shop, travel, eat out or attend large events. That would reverse any rebound in spending and would further weaken the economy.