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First Cut: Advance estimate of first quarter GDP retreats to recessionary territory

The advance estimate of first quarter GDP showed growth retreated to -4.8%, its lowest since -8.4% in the fourth quarter 2008. The reading is now firmly in recessionary territory. The blame can be laid at the door of consumer spending which fell 7.6% for the quarter. Consumers spent far less nondurable goods (-16.1%) as they stuck with only essential spending which tended to be for nondurables (+6.9%) like stocking up on paper goods and nonperishable food. Spending on services was sharply lower (-10.2%) in part because of widespread business closures and little opportunity or desire for public transactions. The latest wave of robust homebuying was evident with a strong 21.0% rise in the first quarter, but that won’t have any momentum into the second. Government consumption was up 0.7%, a share that is likely to be much larger in the second quarter.

Net exports made a positive contribution. While exports were down, the share of exports was greater compared to imports in the first quarter. The change in inventories was a negative contribution as businesses quickly brought inventories under tight control in anticipation of a downturn as well as from lack of imported goods where international trading partners were in quarantine during the pandemic.

The rule of thumb for a recession is two quarters of negative growth. There is little doubt that the second quarter is in for a sizable contraction in activity even if conditions are such that things open up again in June. It will take time for business to ramp up again and it isn’t clear how long temporary layoffs will last or if they will turn into out-and-out job losses.

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