The US Economy Contracted 5% In Quarter 1
On Thursday, the Commerce Department announced that the economic fallout from the coronavirus pandemic resulted in a 5 percent contraction of the US economy in quarter one, according to the Wall Street Journal.
This economic contraction is the largest since the Great Recession. Economists are expecting an even larger contraction in quarter 2 since most lockdown started in the last few weeks of quarter one. The Commerce Department estimated the first-quarter contraction at a 4.8 percent annual rate. “First-quarter growth turned negative from just a two-week shutdown of the economy,” said Rubeela Farooqi, an economist at High Frequency Economics Ltd. “The second quarter numbers will show a massive and unprecedented plunge in output, with weakness across sectors.”
The gap between the estimate and actual contraction rate is attributed to a larger subtraction from private nonfarm inventories. Decreased corporate profits also played a key role. After-tax corporate profits decreased 15.9 percent in the first quarter. Compared to a year earlier, profits were down 11.1 percent.
Economists are estimating that US GDP will decrease anywhere from 39-42 percent at an annualized rate in quarter 2. It's important to note that an annualized rate overstates the severity of the decline because it assumes that the downturn lasts the whole year.
Consumer spending decreases came in below estimates, but are still nothing to be happy about. Personal-consumption expenditures fell at an annualized 6.8 percent rate compared to an estimated 7.6 percent decline. Business investment also declined at a 7.9 percent annual rate, lower than the expected 8.6 percent. “The economy is in a slump right now,” said John Pfeifer, chief operating officer at trucks and equipment maker Oshkosh Corp.
Per-share earnings for S&P500 companies decreased 12.6 percent in quarter one of 2020 compared with quarter one of 2019. The consumer discretionary, financial, energy, and industrial sectors were the hardest hit. However, technology, healthcare, and the consumer staples industry all posted per-share earnings of more than 5 percent. Analysts expect the second-quarter to be worse before gains resume early 2021.
“Swift monetary and fiscal stimulus has been put in place to help the markets to help businesses and those individuals who are suffering, but the stress on the economy is real and will take time to recover,” Morgan Stanley Chief Executive James Gorman said.