U.S. GDP in the first quarter is going to be bad — and the damage is far from done
The spring is shaping up to post the biggest contraction in U.S. economic growth since the Great Depression in the 1930s, but the first quarter is also likely to be pretty bad.
The coronavirus pandemic slammed the U.S. hard enough in March to plunge what had been a modestly growing economy into the first recession in almost 11 years.
Economists polled by MarketWatch predict gross domestic product shrank by 3.9% in the first quarter, marking the steepest drop since the Great Recession in 2009.
Here’s what to watch in Wednesday’s GDP report, which will be released at 8:30 a.m. Eastern.
The rapid shutdown of large chunks of the economy in the last few weeks of March caused spending to nosedive. Restaurants, hotels and countless other businesses closed, millions of workers lost their jobs and anxious Americans began to save their money.
Consumer spending is the lifeblood of the economy, representing about 70% of all economic activity. Outlays probably fell about 3% to 4%, which would also be the largest drop since the Great Recession.
Read:Investors and consumers think the U.S. will recover faster than economists
Investment in equipment and structures such as buildings, plants and oil rigs was already weak before the pandemic struck, largely because of the ongoing trade war between the U.S. and China. The virus is clearly going to trigger an even sharper deterioration in investment in the first quarter and beyond.
The energy industry is especially taking it on the chin with the collapse in oil prices, but auto makers and aircraft makers are sure to suffer a steep drop in demand that sharply curtails their willingness to spend. Business investment might have tumbled 10% to 15% in the first quarter alone.
Housing was probably the lone bright spot. Construction had picked up, owing to a big drop in interest rates, and the quarter ended before too much damage was done.
Read: Why the U.S. economy’s recovery from the coronavirus is likely to be long and painful
Businesses slashed production toward the end of the quarter and reduced the stock of unsold goods sitting in warehouses or on store shelves. The drop in inventories could be as high as $75 billion, acting as the second-biggest hammer on GDP in the first quarter.
The longstanding U.S. deficit in trade probably shrank, but only because both imports and exports started collapsing as the pandemic severely disrupted international trade. A smaller deficit would add to GDP, but signaling nothing particularly good.
The massive increase in government spending will help limit the contraction in the economy by putting more money into the hands of businesses and households, but most of that aid won’t show up in GDP.
How come? Transfer payments are not considered part of GDP, like direct government spending. Higher government spending probably provided a small boost to GDP in the first three months of the year.