Advanced estimates show U.S. economic growth contracts in Q1 2020, likely to shrink further in Q2

The U.S. economy contracted 4.8 percent on an annualized basis in the March quarter of 2020 – the biggest fall since the fourth quarter of 2008 when the economy shrank 8.4 percent. Today’s data is worse than market expectations of a contraction of 4 percent.

The advance GDP estimate is based on source data that are incomplete, and using the typical estimation methods would not have captured the late-quarter impact of COVID-19, noted TD Economics in a research report.

In light of this the Bureau of Economic Analysis chose to use new techniques to fill in data gaps, including private high-frequency credit card transactions, unemployment claims data to identify late-period declines in business production and compensation, and information on the timing of state-mandated school closures that impacted government spending. Nevertheless, the BEA also stated that the entire economic effects of “stay-at-home” orders cannot be quantified entirely in the GDP estimate.

Delving into details, personal consumption expenditures dropped 7.6 percent annualized, driven by a 16.1 percent fall in durable goods and a 10.2 percent fall in services. The durable goods fell was greatly because of a fall in motor vehicles and parts. On the contrary, spending on nondurable goods rose sharply by 6.9 percent, indicating stockpiling activity.

Non-residential fixed investment dropped 2.6 percent, driven by a 15.6 percent fall in equipment spending. Non-residential structures dropped 8.6 percent. Meanwhile, residential construction fared well at the start of 2020 due to an unseasonably warm winter throughout much of the country. Residential investment rose 21 percent in the first quarter, driven by single-family home construction.

Government spending rose modestly by 0.7 percent, driven by activity in federal nondefense spending, which rose 3.1 percent. Meanwhile, international trade dropped significantly in the March quarter. Exports dropped 8.7 percent, while imports fell 15.3 percent. The COVID-19 outbreak in China at the start of the quarter shut down most of its manufacturing sector, and might have reduced shipments to the U.S. Markedly, services imports and exports both fell over 20 percent annualized on the quarter.

Real personal disposable income rose only 0.5 percent in the first quarter, but with the shutdowns keeping Americans from spending money, the personal saving rate rose to 9.6 percent, up from 7.6 percent in the fourth quarter of 2019.

“The second quarter is likely to show an eyepopping contraction on a quarterly basis, roughly 40% annualized. However, given the nature of the shock, annualizing quarterly data can be misleading. It is usually used to provide a sense of the economic ‘run rate’ in a given quarter. But, we do not expect this shock to persist meaningfully beyond the quarter, so it may be more accurate to say that COVID-19 is expected to wipe about 13% from economic activity as compared to the end of 2019”, stated TD Economics.

Given that there are signs that pandemic is easing in some regions of the nation, states have turned their attention to how to start lifting the shutdown.

“Our latest forecast assumed this process gets underway in the latter half of the second quarter and leads to a roughly 25 percent annualized jump in activity in Q3. However, there is high degree of uncertainty given that growth is highly dependent on the pace of re-opening and continued success in limiting the spread of the virus”, added TD Economics.