US economy contracts at 4.8 percent rate, most since Great Recession

The U.S. economy shrank by an annualized rate of 4.8 percent in the first quarter of 2020 as the coronavirus pandemic forced millions of Americans out of work and thousands of businesses across the country to shutter, according to data released Wednesday by the Commerce Department.

U.S. gross domestic product (GDP) fell at a yearly rate of nearly 5 percent since the first quarter of 2019, according to the advance estimate from the Bureau of Economic Analysis (BEA) amid the economic devastation caused by the pandemic and the desperate measures to contain it.

The first quarter of 2020 is the first quarter of negative GDP growth for the U.S. since the same period in 2014, and the worst quarter of GDP growth for the U.S. since 2009.

After two months of solid economic activity and rising consumer confidence, the U.S. was derailed by the steady spread of COVID-19 cases across the country through February and March. The first-quarter drop in GDP was driven by the millions of layoffs and business closures that occurred under social distancing orders from local governments and guidelines suggested by President Trump.

“This led to rapid changes in demand, as businesses and schools switched to remote work or canceled operations, and consumers canceled, restricted, or redirected their spending,” wrote the BEA, warning that “the full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the first quarter of 2020.”

More than 26 million Americans have filed new applications for unemployment benefits since mid-March, according to the Labor Department, likely pushing the jobless rate from 3.5 percent in February to above 20 percent in April. Thousands of businesses across the country are facing financial peril or bankruptcy after being forced to close or limit operations for months.

Consumer spending, which powers roughly two-thirds of GDP, sunk at an annualized rate of 7.6 percent in the first quarter. Spending on durable goods such as appliances, electronics and furniture sunk 16.1 percent, while spending on food, cleaning products and other short-use purchases rose 6.9 percent as Americans stocked up.

Spending on services plunged 10.2 percent after rising by 2.1 percent throughout 2019, and business investment fell 8.6 percent after declining steadily last year.

“Economic growth remained firm in January and February but was sharply curtailed in March as much of the country gradually came under stay-at-home orders in response to the Covid-19 pandemic,” wrote Cailin Birch, global economist at the Economist Intelligence Unit, in a Tuesday research note.

“The real figure to watch will be second-quarter GDP, as much of the negative economic impact will be felt in April-June. Early indicators are flashing strongly negative,” Birch continued, citing sharp declines in purchases of automobile and plane fuel.

As some states inch toward loosening economic restrictions despite rising COVID-19 cases elsewhere in the country, Trump and some of his top advisers have expressed confidence that the U.S. would be able to swiftly recover.

Before COVID-19 seized the U.S., the country enjoyed an unemployment rate that hovered near a 50-year low and more than a decade of consecutive monthly jobs gains.

“I had to turn it off in order to get to a point where we are today,” Trump said during a Monday press conference. “And now we’re making a comeback. And I think we’re going to have, economically — from an economic standpoint, next year — an unbelievable year.”

But few economists share Trump’s optimism, warning that the lack of U.S. coronavirus testing capacity and lingering concerns about another outbreak will continue to dampen the economy until doctors produce a successful coronavirus vaccine or treatment. 

“Today’s first quarter numbers are just the deeply unappetizing appetizer,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a Wednesday research note.

Economists are bracing for a plunge in GDP growth of roughly 30 percent annualized in the second quarter, which spans April to June and covers the likely peak of COVID-19 cases. 

Updated at 10:15 a.m.

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