Depression-like shock, and no depression, are likely to be the mantras for policymakers following this morning’s 4.8% drop in U.S. first-quarter gross domestic product. That drop in output and the 7.6% decline in household consumption almost certainly understate the depth and breadth of the collapse in economic activity.
The data strongly imply that any move to curtail policy support in the near term would be pure folly and create the conditions for a greater economic catastrophe.
This data, and those on the way, should finally lay to rest notions of a V-shaped recovery. Moreover, our base case of a recovery that looks like a Nike swoosh depends upon robust and sustained fiscal and monetary policies put forward by the federal government and Congress.
Given the historical increase in initial jobless claims and declines in economic activity, we expect growth will fall nearly 40% in the current quarter.
Those who worked and lived through the financial crisis will remember that the first estimates of output and unemployment during that crisis were later revised downward. Notably, the initial estimate of fourth-quarter growth in 2008 that implied a 3.8% decline was later revised down to 8.9%. It is highly likely, given the magnitude of the shocks working their way through the American economy, that policymakers and investors should anticipate vigorous downward revisions.
That major takeaway here is that investors should not get too bullish on this morning’s data, and policymakers should be prepared to support other rounds of aid for an economy that is going to be reeling for years to dig out of the hole that the pandemic has blown in the U.S. economy.
As long as policymakers do not lose their nerves, or make a policy mistake such as not providing aid to reeling states and municipalities, there is no reason why the economy should suffer from a deep, extended downturn that meets the definition of a depression. It is a choice, not fate.
Real final sales declined by 4.3%, final sales to domestic purchasers fell 5.9%, final sales to private domestic purchasers declined by 6.6%, all of which support our conjecture that policymakers and investors should anticipate further downward revisions.
Household consumption dropped at a 7.6% pace, which was driven by a 6.1% decline in durable goods purchases and a 10.2% drop in demand for services. The only real solid data point in the consumption data was a 6.9% increase in demand for non-durables.
Gross private investment fell 5.6%; nonresidential investment dropped 8.6%, while residential investment jumped 21%. Fixed investment fell 2.6%, outlays on structures dropped 8.6%, equipment fell 15.2% and outlays on intellectual property increased 0.4%.
Net exports dropped 8.7% and government consumption advanced 0.7%.
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