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Home / Business News / Covid-19: US economy shrinks at 4.8% pace, signalling start of recession

Covid-19: US economy shrinks at 4.8% pace, signalling start of recession

The worse-than-expected report reveals the wide-scale hit to US output from Covid-19 and the subsequent freezing of economic activity.

business Updated: Apr 29, 2020 18:48 IST
Bloomberg
Bloomberg
As the US government and states debate when and how fast to lift restrictions on companies and schools, there remains considerable doubt over the duration of the economic slowdown and the shape of the recovery.
As the US government and states debate when and how fast to lift restrictions on companies and schools, there remains considerable doubt over the duration of the economic slowdown and the shape of the recovery.(Reuters file photo )

The record-long US economic expansion is over after almost 11 years, with the deepest recession in at least eight decades now under way.

The world’s largest economy shrank at a 4.8% annualized pace in the first quarter, the biggest slide since 2008 and the first contraction since 2014, as the need to fight the coronavirus forced businesses to close and consumers to stay home.

The downturn, reported Wednesday by the Commerce Department, was led by the steepest drop in consumer spending since 1980 and the fastest decline in business investment in almost 11 years.

The worse-than-expected report reveals the wide-scale hit to US output from Covid-19 and the subsequent freezing of economic activity.

The current quarter is likely to be far worse, with analysts expecting the economy to tumble by a record amount in data going back to the 1940s. Bloomberg Economics has projected a 37% annualized contraction, but UniCredit is the most bearish with a 65% estimate.

Crisis, Recovery

That will end an expansion that began in mid-2009 when the economy began to recover from the financial crisis. Since then, gross domestic product swelled by $7 trillion and unemployment had fallen to a five-decade low of 3.5%, although some have questioned how widely the benefits have been spread with an increasing concentration of wealth at the top and wages rising at a relatively tepid pace for most of the expansion.

The pain is being felt worldwide with China already reporting a sharp decline in output and the euro-area set to deliver grim figures Thursday.

As the US government and states debate when and how fast to lift restrictions on companies and schools, there remains considerable doubt over the duration of the economic slowdown and the shape of the recovery.

Early hopes for a rapid rebound have faded with most analysts assuming a jump in activity once the virus passes will be followed by a slower resumption of growth. So far, many data points signal a deepening contraction, while others have shown slight improvement, according to a Bloomberg Economics tracker.

Consumers Wary

Despite massive government aid packages and near-zero interest rates, businesses big and small risk going bankrupt, while consumers may remain wary of hitting shops and restaurants amid health concerns, higher debt burdens and job insecurity.

Another big question is how the recession affects the re-election chances of President Donald Trump, who lately has been pushing for removal of the constraints after losing the ability to run on a strong economy.

At the Federal Reserve, which slashed rates and rolled out a slew of emergency and unprecedented lending programs, Chairman Jerome Powell and colleagues are trying to limit the virus’s damage to jobs and business while setting the conditions for recovery.

They conclude a two-day meeting later Wednesday, with a statement expected at 2 p.m. in Washington and a press conference by Powell at 2:30 p.m.

While two quarters of contraction is considered by most to constitute a recession, the official call in the US is made by the Business Cycle Dating Committee, a panel of economists at the National Bureau of Economic Research. They look at a wide range of indicators including consumer spending, employment and GDP.

The analysis can take a while. In the last recession, which became the longest since World War II, the committee didn’t make the determination for nearly a year after the downturn started.

In any case, the GDP figures underscore what’s already clear from government data showing 26 million Americans filing for unemployment, along with plunges in retail sales and factory production.

The contraction in first-quarter GDP -- the first decline since a 1.1% drop in 2014 -- compared with the median projection for a 4% drop in a Bloomberg survey of economists. In January, analysts were forecasting growth of 1.6%.

Spending Habits

Consumer spending, which had already begun to cool in the second half of 2019, fell at a 7.6% rate. Changing consumption habits were evident in the report, as the biggest increase since 2003 in spending on nondurable goods such as food was more than offset by the largest slump in purchases of durable goods in more than 11 years.

Consumption is forecast to be much weaker in the second quarter because broader government measures including closures of restaurants and stores didn’t start in earnest until mid-to-late March, and they continue today in much of the U.S.

Business investment, already down for three straight quarters as the U.S.-China trade war kept companies guessing, also took a big hit. Companies slowed spending on structures and equipment. Investment in software rose, however, potentially reflecting efforts to help employees work from home.

Exports of services fell by the most since 1975, reflecting a decline in international travelers coming to the U.S.

The first-quarter GDP figures will be revised several times, and some economists broadly expect the reading to become weaker as more data and adjustments are made.

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