U.S. gross domestic product (GDP) declined in the first quarter of 2020, according to new data from the Bureau of Economic Analysis. Specifically, real GDP, which measures the value of the production of goods and services in America adjusted for price changes (inflation), decreased at an annual rate of 4.8 percent in Q1. That was the first decline in six years and the largest since the “Great Recession.” Measures of personal consumption expenditures (consumer spending), nonresidential fixed investment, exports, and private inventory investment all detracted from GDP in Q1, although the bulk of the damage occurred in March when the coronavirus-related disruptions ramped up. As usual it is worth mentioning that this is only the first estimate of Q1 GDP, meaning that large revisions are possible over the next few months. As disappointing as this report already is, the data for the second quarter should be significantly worse. However, it is probably also safe to assume that the Q2 GDP report could be as bad as it gets and that the economy might have even bottomed already.
To clarify, “bottomed” does not necessarily mean a V-shaped recovery where the second half of 2020 sees a sharp resurgence in GDP growth, but simply that the late-March through early-May period could represent the trough in activity. For example, basically 100 percent of dine-in restaurants and non-essential retail outlets in America were shut down this month due to the lockdowns, therefore leaving little, if any, room for these and similarly affected areas of the economy to deteriorate, especially now that many states are starting to gradually lift their destructive restrictions. Put simply it is hard to get much worse than “worst ever.” “Worst ever,” though, should remain the theme in May as the economic data released next month will predominately be backward-looking and describe what happened in April. This is another reason why it is important to remain forward-looking during this crisis as the incoming data do not fully reflect recent progress. Investors clearly understand this since the stock market has so far been little-fazed by the constant influx of weak economic reports, and many Americans encouragingly appear aware of this as well based on yesterday’s consumer confidence update. Indeed, surveyed Americans’ overall assessment of current economic conditions tumbled in April. That is an unsurprising side-effect of the millions of job losses and other economic disruptions caused by the forced store closures and shelter-in-place orders, but surveyed consumers’ general outlook on the future actually improved markedly in April (largest increase since July 2019). The report’s authors attributed the uptick in forward optimism to “the possibility that stay-at-home restrictions will loosen soon, along with a re-opening of the economy.”
Sources: Econoday, U.S. DoC, The Conference Board, FRBSL