First Look at the First Quarter Contraction

This morning the Bureau of Economic Analysis (BEA) released its advanced estimate of U.S. gross domestic product (GDP) for the first quarter of 2020 (also known as January through March, or 2020Q1). Real GDP—our broadest aggregate measure of economic activity, adjusted for inflation—contracted at a seasonally adjusted annualized rate of 4.8%, the sharpest rate of contraction since an 8.4% drop in the fourth quarter of 2008, the worst of the Great Recession. Via FRED:


As for the annualized rate? U.S. real GDP shrank 1.2% between 2019Q4 and 2020Q1, and annualizing this quarter-over-quarter contraction to 4.8% makes for a better comparison with annual or year-over-year growth rates. Put differently, U.S. economic output would be 4.8% smaller by year’s end if this quarter’s pace of contraction continued for a full year (which it surely won’t—2020Q2 is going to be way worse, discussed below).

The headline numbers came in slightly worse than expected: MarketWatch was reporting a median economic forecast of a smaller 3.9% annualized contraction.

The first quarter contraction was heavily driven by an unprecedented collapse in the service economy. Major areas of weakness in today’s report: Personal consumption of long-lasting, big-ticket durable goods plunged 16.1%, private investment in equipment fell 15.2%, and personal consumption of services fell 10.2% (all expressed as seasonally adjusted annual rates). Durable goods and private investment are interest rate sensitive, relatively volatile, and typically crash during recessions. The collapse in services is far more unusual, and reflective of the pandemic and interpersonal nature of many services. The worst decline in consumption of services during the Great Recession was -1.4% in 2009Q1—nearly an order of magnitude smaller! And the drop in personal consumption of services contributed -5.0 percentage points to annualized real GDP growth of -4.8% for 2020Q1—by far the biggest drag from services on record.

For a more detailed take, economist Dean Baker of the Center for Economic and Policy Research (CEPR), a DC-based think tank, has a great rundown on the advanced GDP report. Recommended reading:

This morning’s release is called “advanced” because our GDP data see a lot of revisions, as the data series used to construct GDP are themselves revised. A revised “preliminary” second estimate of 2020Q1 will be released May 28 and a third “final” estimate will be released on June 25 (BEA’s release schedule is available here). The term “final” estimate is also somewhat misleading; the BEA later revises the last five years’ worth of data each summer (a recent explainer can be found here).

Throughout the Great Recession our initial reads on GDP proved overly rosy, and subsequent downward revisions showed us sinking into a larger hole. Take that annualized contraction of 8.4% in 2008Q4 as an example. The advanced estimate for 2008Q4 showed a quarterly contraction of 3.8% (see this archived BEA release from January 2009), which was revised down to 6.2% in the preliminary report (archived release from February 2009) and again to 6.3% in the final report (archived release from March 2009). The BEA’s annual revisions released in July 2011 abruptly showed a much larger contraction of 8.9% for the quarter…

It’s a safe bet that subsequent revisions will show the U.S. economy falling into a deeper hole in the first quarter, before falling off a cliff in the second quarter. Goldman Sachs, JP Morgan, and the Congressional Budget Office are all forecasting annualized declines on the order of 35-40% for 2020Q2, meaning that economic activity will shrink roughly another 9-10% relative to the first quarter. The advanced read on U.S. real GDP in the second quarter of the year won’t be released until July 30.

The latest update of the New York Fed’s Weekly Economic Index, scaled to annualized real GDP growth, suggests an economic contraction of 11.6% if current levels of activity persisted—a substantially larger contraction than shown in this morning’s GDP report:


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