It’s hard to remember a negative GDP result that may have been as easy to shrug off as this one — not because it’s irrelevant, but because it’s widely understood to be the tip of the iceberg compared to what the second quarter holds in store.
The message is clear: the longest expansion in U.S. history is over. The economy contracted more sharply than expected, falling at a 4.8% annualized pace in the first quarter, marking its first quarterly contraction since 2014 and easily the largest drawdown since the global financial crisis.
That result was notably below consensus expectations for a decline of around 4%, which in a different environment would be a surprising miss. Still, the range of expectations heading into this report was unusually wide, indicative of the heightened degree of uncertainty around the current environment and the difficulty in measuring such a sharp reversal in spending activity in such a short period of time. Given those challenges, it’s also quite possible that revisions in that data could also be larger than normal.
For much of the first quarter, it was business as usual. That turned on a dime in mid-March, as businesses and schools closed their doors, event cancellations mounted, and shelter-in-place orders across much of the country led to a bunker mentality for many Americans.
After a decade in which consumers were far and away the primary driver of the U.S. economy, the sharp downturn in top-line growth for the quarter illustrates that dynamic cuts both ways. The slashing of consumer spending is no surprise considering that over 26 million individuals filed for new unemployment benefits in the past five weeks. Furthermore, a sharp decline in March’s retail sales report already confirmed that the COVID-19 pandemic put a sizable dent in discretionary spending. Even so, the 7.6% decline in consumer spending likely deteriorated further in April.
Looking ahead, it’s less clear how severe the decline in spending will be, let alone how long it will last. With public pressure increasing in some parts of the country to re-open the economy, the potential for some degree of near-term stabilization certainly exists if consumers begin to re-emerge. Even so, the continuing health threat hangs heavy, and the risk of another wave of viral spread could force a return to shelter-in-place orders.
The fact of the matter is that, unlike many recessions, the current decline in the economy is not of a financial origin; the economic fallout is a symptom of a severe non-economic threat. While there can and should be an economic response, it will take greater clarity around the direction of the pandemic and the global health threat to determine with greater precision the potential path forward for the economy.
The bottom line is that the economy ground to a halt late in late March, a fact that was readily apparent in everyday life well before it was evident in the data. It’s likely the reverse will also be true. Those looking for a turning point in the economy would be wise to watch for changes in policy and changes in behavior. The first will be easier to pinpoint and could happen swiftly; the latter will present a much greater challenge, as individuals weigh the desire to return to some sense of normalcy against the ability both financially and psychologically to do so.
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