The Economy

U.S. GDP Contracts 5% in Q1 as Corporate, Consumer Spending Plunge

The coronavirus pandemic triggered 'rapid changes in demand' as governments issued stay-at-home orders.
U.S. GDP Contracts 5% in Q1 as Corporate, Consumer Spending Plunge

The U.S. GDP contracted 5% in the first quarter of 2020, the largest since the 2008 recession.

The metric was worse than the 4.8% drop economists projected, and it heralds the end of the nation’s longest recorded expansion period and a steep drop from the previous quarter’s 2.1% growth.

4 Powerful Communication Strategies for Your Next Board Meeting

4 Powerful Communication Strategies for Your Next Board Meeting

This whitepaper outlines four powerful strategies to amplify board meeting conversations during a time of economic volatility. 

“The decline in first-quarter GDP reflected the response to the spread of COVID-19, as governments issued ‘stay-at-home’ orders in March,” according to the Bureau of Economic Analysis (BEA). “This led to rapid changes in demand, as businesses and schools switched to remote work or canceled operations, and consumers canceled, restricted, or redirected their spending.”

It’s Messy Under the Hood

The decline includes drops in personal consumer expenditures (PCE), private inventory investment and nonresidential fixed investment, and exports, which were partly offset by increases in government spending and residential fixed investment.

“The decrease in PCE reflected a decrease in services, led by health care as well as food services and accommodations,” the BEA said. “The decrease in private inventory investment was mainly in nondurable goods manufacturing, led by petroleum and coal products.”

Profits for nonfinancial corporations decreased $169.5 billion compared with the previous period’s $53.7 billion increase, while financial corporations saw a decline of $67.4 billion compared with the previous period’s $700 million increase.

Things Could Get Worse

Economists anticipate further GDP contraction in the second quarter. Two consecutive quarters of negative growth signal a recession.

“The chances are that this year, we will hit the point where our national debt is the equivalent of the size of the economy,” Maya MacGuineas, president of the Committee for a Responsible Federal Budget, told Fox Business Tuesday. “And that comes many years in advance of when we thought this would happen.”

The CRFB estimates a $3.8-trillion deficit for 2020 — more than two times the previous record set in 2008, and nearly four times last year’s $984 billion.

This would bring the national debt to $20.6 trillion by October, which would surpass the $20-trillion nominal GDP. The CRFB expects the debt-to-GDP ratio to exceed the World War II ratio of 106 by 2023.

The U.S. government isn’t the only one driving up debt to avert a coronavirus crisis. Earlier this week, BlackRock’s Investment Institute forecasted higher corporate credit defaults for the year.

Persistent Unemployment Won’t Help

Thursday’s GDP report was released at the same time as the mid-May jobless report, which revealed 21.05 million continuing jobless claims against a 25.75-million forecast and a prior week benchmark of 24.91 million. Initial jobless claims fell from 2.45 million the previous week to 2.12 million.

The improving metrics didn’t inspire unbridled optimism.

“I am concerned that we are seeing a second round of private-sector layoffs that, coupled with a rising number of public sector cutbacks, is driving up the number of people unemployed,” Joel Naroff, chief economist at Naroff Economics, told Reuters.

“If that is the case, given the pace of reopening, we could be in for an extended period of extraordinarily high unemployment. And that means the recovery will be slower and will take a lot longer.”

To address the widespread unemployment and aid their local economies, state governors have turned to the federal government for aid. Their aggregate request for $500 billion would only exacerbate the U.S. deficit.

Any permanent impacts on consumer spending won’t help the GDP either.

“Now is a good time to think how many of those people who lost their jobs are going to get them back; my sense is 25% will not and that’s what gives us the double-digit unemployment rate well into 2021,” Joe Brusuelas, chief economist at RSM, told Reuters.

“The bankruptcies of small and medium enterprises will result in a much higher rate of permanent layoffs.”

This story originally appeared on Benzinga.

© 2020 Benzinga does not provide investment advice. All rights reserved.

Stephanie Keith/Getty Images