PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

First Quarter GDP: The Big and Expected Plunge

By at 29 April, 2020, 12:19 pm

by Raymond J. Keating-

We all knew an ugly first quarter GDP number was coming due to COVID-19-related government “stay at home” orders, “non-essential” business closures and the limitation placed on restaurants, among other service firms. According to the U.S. Bureau of Economic Analysis report, it turned out a big uglier than some assumed.

Real first quarter GDP plunged by 4.8 percent. That decline was bigger than most estimates – or more accurately, given the circumstances, guess-timates – that had been tossed around. For example, MarketWatch.com pegged its median forecast at -3.9 percent.

And all of the key categories in the measure of GDP – that is, gross domestic product, or the value of goods and services produced in the economy – were down significantly.

Real personal consumption expenditures dropped by 7.6 percent in the first quarter.

Gross private domestic investment declined by 5.6 percent. And that included a decline in business investment (i.e., nonresidential fixed investment) of 8.6 percent. (Oddly, residential investment actually increased by 21 percent in the first quarter.)

And on the trade front, real exports plummeted by 8.7 percent, with real imports suffering an even larger decline, i.e., -15.3 percent.

To put this all in some kind of historical perspective, looking at quarterly GDP data going back to 1947, consider the following:

● The 4.8 percent drop in real GDP was the largest since the 8.4 percent decline in the fourth quarter of 2008. Since 1947, there have only been seven quarters when the U.S. economy experienced a larger decline in real economy activity than this -4.8 percent (i.e., declines of, again, 8.4 percent in the fourth quarter of 2008, 6.1 percent in the second quarter of 1982, 8.0 percent in second quarter of 1980, 5.0 percent in the fourth quarter of 1960, 10.0 percent in the first quarter of 1958, 5.9 percent in the fourth quarter of 1953, and 5.4 percent in the first quarter of 1949). The 4.8 percent decline also was matched in the first quarter of 1975.

● As for real personal consumption expenditures, the 7.6 percent fall off in the first quarter of this year was only exceeded in the second quarter of 1980 (-8.7 percent), the second quarter of 1951 (-10.8 percent), and the fourth quarter of 1950 (-11.5 percent).

● Regarding business investment, it needs to be pointed out that the 8.6 percent decline in the first quarter of 2020 came after declines in the previous three quarters (-2.4 percent in the fourth quarter 2019, -2.3 percent in the third quarter, and -1.0 percent in the second quarter 2019). The declines during the 2008-09 meltdown were notably larger, for example, -21.3 percent in the fourth quarter 2008, -26.9 percent in the first quarter 2009, and -11.6 percent in the second quarter 2009.

● The first quarter 2020 drop of 8.7 percent in real exports came after two years of weakness. In addition, there were massive declines in 2008-09, specifically, drops of 20.4 percent in the fourth quarter 2008 and 28.6 percent in the first quarter 2009.

● A similar pattern occurred regarding imports, with the 15.3 percent decline in the first quarter 2020 following on two years of weakness. Meanwhile, declines in two quarters during the 2008-09 mess were larger, that is, -34.0 percent in the first quarter 2009 and -15.6 percent in the second quarter 2009.

Unfortunately, an even steeper decline in economic activity – indeed, markedly larger – is on its way for the current second quarter of 2020. In fact, this quarter could experience the largest quarterly drop in real GDP during the post-World-War-II era.

The real debate starts when looking at the second half of this year and beyond, with that economic activity depending upon the state of the coronavirus and how quickly public policy pivots from providing short-tern aid to individuals and small business, to government stepping back and allowing free enterprise to once again flourish.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

 

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