U.S. economy, in clear sign of recession, shrinks 4.8 percent
WASHINGTON — In the broadest measure so far of COVID-19's economic damage, the government said Wednesday that total U.S. output in the first quarter fell at a 4.8% annual pace — faster than at any time since the Great 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. The full dimension of the pandemic's economic damage will not be visible in the data until the second quarter.
"Overall economic activity will likely drop at an unprecedented rate in the second quarter," said Federal Reserve Chair Jerome Powell. He vowed strong policy action from the central bank and said that Congress needed to do more to support the economy.
"This is an extraordinary, extraordinary shock, unlike any that's happened in my lifetime," Powell said at a video news conference Wednesday after the Fed's policy meeting.
Wednesday's economic report left little doubt that the nation's record 10 { years of economic expansion has come to an abrupt end, with profound political and economic repercussions.
A recession poses serious challenges to President Donald Trump's reelection strategy, which was designed to capitalize on now-vanishing prosperity.
The pandemic also creates potential problems for Democrats hoping to rely on traditional campaign rallies and other methods of building support.
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, state governments imposed lockdowns, and claims for unemployment benefits skyrocketed.
Economists have projected the GDP to crater in the second quarter by a record annual rate of 30% or more.
"It's just the first leg of our journey," Joel Prakken, chief U.S. economist at IHS Markit, said of Wednesday's report from the Commerce Department.
The research firm now sees a 37% annualized plunge in GDP for the current quarter. The steepest quarterly drop during the Great Recession was 8.4% in early 2009.
"This is going to blow that out of the water," Prakken said.
The GDP grew at a moderate 2.1% pace in the fourth quarter of last year and by 2.3% for all of 2019. The numbers are adjusted for inflation.
In one hopeful sign, Prakken and others said the second quarter could very well turn out to be the bottom for the economy because some states already have begun to allow businesses to reopen, and eased up on lockdowns and restrictions for public gatherings.
The economy should also be getting a lift from the nearly $3 trillion in various relief spending by Congress — including more than $650 billion aimed at small businesses — and trillions more of lending and credit programs orchestrated by the Fed.
The Fed responded swiftly to the coronavirus outbreak, slashing its benchmark interest rate to near zero in mid-March and announcing multiple lending facilities, including support for budgetstrapped states and cities, to limit business failures and job losses.
Powell told reporters that Fed officials are "not going to be in any hurry" to raise rates or withdraw other policy support for the economy.
Stocks rallied Wednesday
as investors were buoyed by hopes that a drug would soon be developed to treat COVID-19. The Dow Jones industrial average surged 532 points, or 2.2%, to close at 24,634.
Stock markets have made a strong recovery in recent days as more states have moved to relax lockdowns and reopen the economy. Many analysts, however, said that the outlook for the economy and corporate earnings does not support the price gains.
"Equity market investors are whistling by the COVID graveyard," said Diane Swonk, chief economist at the accounting firm Grant Thornton in Chicago.
"You really get the sense that the stock market, Wall Street, has disconnected from Main Street entirely, and is looking at a much more robust recovery than can occur, even in the bestcase scenarios."
Even if easing of social distancing rules does not trigger a secondary surge of infections that forces another pullback, a shortlived downturn does not necessarily mean a quick return to pre-pandemic times.
"The ongoing public health crisis will weigh heavily on economic activity, employment and inflation in the near term, and poses considerable risks to the economic outlook over the medium term," the Fed said in its policy statement Wednesday. Powell described the medium term as a year or a little longer.
Although the U.S. economy could start growing again this fall, most economists see a halting recovery given the uncertainty of the medical situation and the magnitude of the financial losses to businesses and consumers, who account for the bulk of U.S. economic activity.
Consumer spending in the first quarter tumbled at a 7.6% pace as purchases for cars and other bigticket items tanked in March, as they did for travel and a host of services, including visits to restaurants and dentists' and doctors' offices.