U.S. recession has begun
Bottom Line Gross domestic product (GDP) plunged by a worse-than-expected 4.8% in the first quarter of 2020, marking the largest decline since the depths of the Great Recession in the fourth quarter of 2008. The U.S. economy is now mired in recession, as the federal government made an intentional decision to effectively shut down the economy to prevent the spread of the coronavirus.
This was much worse than the Bloomberg consensus of -4%, the Blue Chip consensus of -3.8%, our -1.8% forecast here at Federated Hermes and the Atlanta Fed’s GDPNow model of -1%. U.S. GDP now approximates $21.54 trillion in current dollars.
With much of the retail landscape starting to close in mid-March, personal consumption (accounting for 70% of GDP) was significantly weaker than expected in the first quarter. It declined 7.6% quarter-over-quarter (q/q) annualized, its worst performance in 40 years. Corporate capital spending also fell sharply by 8.6% q/q, its fourth consecutive quarterly decline, with the energy sector a major drag. Finally, the pace of inventory accumulation turned negative, with a decline of $16.3 billion.
On the positive side of the ledger, housing surged 21% q/q, the strongest gain in eight years. But this likely does not reflect March’s industry-wide collapse, suggesting that a downward revision is in the pipeline. Imports fell much more than exports due to weak domestic demand outweighing the strong dollar, resulting in an improvement in net trade. While government spending was positive across the board, it represented the smallest gain in five quarters.
To be sure, this first-quarter GDP flash was undeniably brutal and merely an ugly warm-up act for the second quarter. We are forecasting a 20.2% q/q decline, while the Blue Chip is estimating a 24.5% decline, with some estimates as low as a 50% dive.
So how did the equity market respond yesterday to the news? The S&P 500 surged nearly 3%, capping a powerful 35% rally since the equity market’s oversold March 23 bottom.
How is that possible? Return to our “three-legged stool” analysis last month. It appears the trajectory of illnesses and deaths from the coronavirus here in the U.S. actually peaked earlier in April and have begun to recede. This should allow the government to slowly and methodically reopen the economy—in conjunction with robust testing and tracing—over the next two months. Also, the enormous monetary and fiscal policy response has served as an effective bridge loan for the economy. Finally, great news came yesterday that human clinical trials of Gilead's antiviral drug Remdesivir suggest it improves the treatment of Covid-19. By fall, the FDA could provide fast-track authorization to mass produce it.
With these positive developments, we continue to believe this recession will be relatively short-lived, with a return to positive economic and corporate-profit growth by the third quarter.