The BEA announced that 2020 Q1 real GDP fell 4.8% at a seasonally adjusted annual rate. This is the first decline in 6 years after the longest expansion in US history.
As a comparison to the Great Recession declines, the following graph shows GDP changes since 2007.
Personal consumption expenditures took a major hit, falling 7.6% as people are on a forced “staycation”. Durable goods consumption fell 16.1% while nondurable consumption rose 6.9%. The consumption of services fell 10.1%.
Gross private investment fell 5.6% with nonresidential structures declining 9.7% and equipment investment 15.2%. Note that nonresidential investment has declined every quarter over the past year. Residential investment, on the other hand, increased 21.0% this quarter and saw increases over the past three quarters as well. That pattern will reverse itself as the housing market has begun to follow the rest of the economy.
The Q1 data only partially reflect the large shutdowns of business, much of which happened around the ides of March. The data likely overstates consumer spending and understates the decline in other services. We expect the next release to contain substanital revisions to what is in this report.
Unfortunately, the news will only get worse for the next quarter. Signs of opening are starting, but are months off for many states. Estimates of the size of the second quarter decline vary widely but all signs point to Great Depression magnitudes. What the rebound will look like like is the subject of much speculation but a lot depends on the effectiveness of the massive stimulus and the aggressive stance of the Federal Reserve, who reiterated they will use everything in their arsenal to help smooth the hardships experienced by firms and households.
Although governments can shut down an economy as we have just witnessed throughout the world, it won’t be the government who will open it…that lies in the hands of the consumers. How fast consumers will feel safe in returning to stores, restaurants and travel is unknown.
The BLS announced the much anticipated March employment report that seems to have captured more of the COVID-19 effect than originally thought. Payroll employment fell 701,000 with a decline in 713,000 in the private sector.
While not unprecedented, it is certainly a major event. During the Great Recession between November, 2008 and April 2009, employment changes were:
November, 2008
-727,000
December, 2008
-706,000
January, 2009
-784,000
February, 2009
-743,000
March, 2009
-800,000
April, 2009
-695,000
The largest one month decline occurred in September, 1945, with a loss of 1,959,000. There have been many one-month declines of 600,000 or greater.
But it is important to remember that that the reference week for this report was mid March and the last two weeks have been brutal with record unemployment initial claims of 3,307,000 in the week ending March 21 and another 3,341,000 in the week ending March 28, bringing the total to 6,648,000 new claims for unemployment benefits, roughly 10,000,000 new claims over the past two weeks. Even those lag reality because unemployment insurance systems have been unable to keep up with the influx.
Given the headline of initial claims being thrown about, it is useful to understand exactly what this statistic measures. The BLS defines initial claims as, “An initial claim is a claim filed by an unemployed individual after a separation from an employer. The claimant requests a determination of basic eligibility for the UI program. When an initial claim is filed with a state, certain programmatic activities take place and these result in activity counts including the count of initial claims. The count of U.S. initial claims for unemployment insurance is a leading economic indicator because it is an indication of emerging labor market conditions in the country. However, these are weekly administrative data which are difficult to seasonally adjust, making the series subject to some volatility.”
In addition, continued claims are defined as, “A person who has already filed an initial claim and who has experienced a week of unemployment then files a continued claim to claim benefits for that week of unemployment. Continued claims are also referred to as insured unemployment. The count of U.S. continued weeks claimed is also a good indicator of labor market conditions. Continued claims reflect the current number of insured unemployed workers filing for UI benefits in the nation. While continued claims are not a leading indicator (they roughly coincide with economic cycles at their peaks and lag at cycle troughs), they provide confirming evidence of the direction of the U.S. economy.”
By far the biggest drops in employment were in the service sector – in retail trade and leisure and hospitality. The leisure and hospitality sector employs about 16.3 million workers, so the 459,000 drop is about 3% of the workforce. Many believe the fraction of that workforce will drop substantially more. The ensuing months will show the carnage in other sectors.
Several sectors had to increase their staff due to the surge for certain products. General merchandise stores, including warehouse clubs and supercenters saw an increase of 7,900 employees. Warehousing and storage up 8,200. Finance and insurance up 2,500. Professional and technical services up 6,500.
Average hours of work fell to 34.2, however average hourly earning rose from $28.51 to $28.62, likely reflecting the loss of jobs in the service and retail sectors.
The household survey showed a decrease in employment of 2,987,000 and a decrease of 1,633,000 in the labor force. The employment to population ratio fell to 60.0 from 61.1. The unemployment rate rose to 4.38% as the number unemployed increased by 1,353,000.
The expectation is that the second quarter will see a dramatic rise in the unemployment rate. What is different about this experience is that fall in economic activity is so widespread and the collateral damage is likely to be great. In the Great Depression unemployment took a few years to reach its peak of over 24%. We could see the unemployment rate reaching toward 20% in a few months. One uncertain element is the effectiveness of the massive stimulus package some of which is aimed at keeping firms from laying off workers.
