By Thomas Cooley and Peter Rupert
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.
