Report to reveal virus damage
First quarter GDP likely to be bleak
A report Wednesday on the economy’s severe contraction during the first three months of the year will provide the first sweeping snapshot of the early damage wrought by the coronavirus pandemic, but the ugly numbers will likely be dwarfed by the current quarter’s historic free fall.
Later Wednesday, the Federal Reserve is expected to fill out the grisly picture by downgrading its view of the economy and renewing its vow to do whatever it takes to help the nation weather the storm and bolster an expected recovery in the second half of the year. No major new policy actions are expected.
Economists surveyed by Bloomberg estimate the Commerce Department will report that gross domestic product fell an annual rate of 3.8% in the first quarter, which would be the steepest drop since the depths of the Great Recession in early 2009. The data will highlight “an economy already in deep recession,” Goldman Sachs wrote in a research note.
Keep in mind the economy didn’t come off the rails until mid-March, when states began shutting down nonessential businesses such as res
taurants, most stores and movie theaters to contain the spread of the virus, adding to a travel and leisure industry that was already at a virtual standstill.
“Up until that point, the economy was doing fine,” says economist Kathy Bostjancic of Oxford Economics.
Now, however, about 30% of the nation’s economic output has been shuttered, Moody’s Analytics estimates, though states such as Georgia, South Carolina and Texas are starting to allow many businesses to reopen.
Not surprisingly, consumer spending, which makes up 70% of economic activity, is projected to make up the bulk of the first-quarter slide. Retail sales fell a record 8.7% in March as clothing, furniture, recreational goods, restaurants and bars, and autos fell an eye-popping 20% to 50%.
The declines largely can be traced to the state shutdowns but related job losses also began playing a significant role as laid-off workers reined in spending, Bostjancic says. In March, about 10 million Americans filed initial claims for jobless benefits – a reliable gauge of layoffs – and that figure has since ballooned to 26 million.
Consumer confidence in April fell to the lowest level since June 2014, the Conference Board said Tuesday.
Business investment also plummeted early in the year as confidence shriveled and oil prices crashed, leading to a sharp pullback in oil rigs. Goldman estimates business spending on structures and equipment fell about 14% last quarter.
Residential investment is expected to partly offset the tumble in consumer and business spending, according to Royal Bank of Canada, as low mortgage rates spurred housing starts.
Goldman says the first-quarter contraction reported Wednesday will reflect only part of the actual drop. Typically, Commerce’s initial GDP estimates are limited because some data is partial and other figures aren’t yet available, and those gaps are accentuated during major economic shifts like the current one, Goldman says. What’s more, the research firm says, many businesses were closed and couldn’t provide numbers.
As a result, Goldman predicts a 4.8% decline in first-quarter GDP but suggests the real drop -- which could be at least partly reflected in subsequent revisions -- is closer to 8.25%.
Any of those figures will be dwarfed by RBC’s estimated 30% fall in GDP in the current quarter. Nomura forecasts a 41.7% plunge, the largest since the 1880s. Moody’s expects the unemployment rate – which climbed from a 50year low of 3.5% in February to 4.4% in March – to soar to 15% to 20% in the second quarter.
Economists expect a significant recovery in the second half of the year as businesses reopen but it will likely be limited by consumer and business caution until a virus vaccine is available, perhaps by mid-2021. Many don’t expect U.S. economic output to return to its pre-pandemic level until the second half of next year or later.
The Fed is likely to provide a more updated, but less precise, picture of the economy in its post-meeting statement. Goldman expects the central bank to note that “economic activity has contracted steeply” and “labor market conditions have deteriorated rapidly” while both consumer and business spending have slumped.
The Fed already has taken extraordinary steps to prop up the economy, including cutting its key short-term interest rate to near zero and renewing Treasury and mortgage bond purchases to thaw frozen financial markets and hold down long-term borrowing costs for consumers and businesses. The Fed had said it would buy $500 billion in Treasury bonds and $200 billion in mortgage securities but then said it would buy as much as needed.
The Fed’s balance sheet has swelled by a stunning $2.2 trillion to a record $6.6 trillion since mid-March.
The central bank also has provided low-interest credit to support struggling markets for corporate bonds; small and midsize businesses; student, auto and credit card loans; money market mutual funds; and states and cities, among other borrowers.
Goldman Sachs predicts a 4.8% decline in first-quarter GDP but suggests the real drop is closer to 8.25%.