Economic Growth Fell by 4.8% in First Quarter

Many businesses on Colfax Avenue in Denver are closed because of the Covid-19 pandemic. (Courthouse News photo/Amanda Pampuro)

(CN) — The U.S. economy shrank at a rate of 4.8% in the first three months of 2020, and the second quarter is expected to be even worse as the coronavirus pandemic continues to ravage the U.S. economy.  

The gross domestic product, a primary indicator of economic health that measures output of goods and services, saw its biggest drop since late 2008. By comparison, GDP grew by 2.1% in the fourth quarter of last year.

Some experts predict economic growth could fall by 25% to 40% in the second quarter, as the economy faces its biggest crisis since the Great Depression nearly a century ago.

Paul Ashworth of Capital Economics says the worst is yet to come.  

“Since the pandemic-related lockdowns only really began in earnest in the final two weeks of the quarter, the 4.8% annualized decline in GDP over the first quarter as-a-whole illustrates that activity must have fallen very sharply in the second half of March,” Ashworth said in a statement. “Even with some states now tentatively re-opening, we anticipate a 40% annualized decline in second-quarter GDP.”

The Congressional Budget Office also expects the GDP to shrink at an annual rate of 40% in the second quarter, while federal budget deficit is projected to top $3.7 trillion. Unemployment is expected to average 14% during the second quarter, up from less than 4% in the first quarter. 

Joel Naroff of Naroff Economic Advisors said the second quarter “will be bad, but how bad we just don’t know.”

“Regardless of what we saw in the first quarter, all eyes are on the second quarter, where we could see the largest drop since the Great Depression,” Naroff said. “But forecasting that number with any accuracy is largely impossible. We have no idea how fast the economy will start opening back up.”

Consumer spending, which accounts for most economic activity, fell by 7.6% in the first quarter, according to a Commerce Department report released Wednesday. That marks the biggest drop since 1980.

Business investments continued to fall with a 2.6% decrease from January to March, after a 1.5% drop at the end of last year.

Federal spending was up 1.7% in the first quarter, and that number is also expected to jump much higher in the second quarter as the government spends trillions to lessen the economic impact of the Covid-19 pandemic.

The decline in GDP in the first three months of the year marks the official end of the longest economic expansion in U.S. history, which lasted over 10 years.

On Wall Street, investors shrugged off the news as markets opened to moderate gains.

The Commerce Department’s report Wednesday is its first estimate of GDP changes in the first quarter. It will issue updated estimates in the next several weeks.

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