U.S. Economy Contracts at Fastest Pace Since Great Recession, Worse Still to Come

The American economy contracted at the fastest pace since the Great Recession in the first quarter of 2020, official figures show, a sign of just how hard the coronavirus pandemic has hit.

The Bureau of Economic Analysis recorded a 4.8 percent fall in GDP during the first three months of the year on an annual basis. Most of that decline was in March when the pandemic took hold firmly in the U.S.

Mohamed A. El-Erian, chief economic adviser to the financial firm Allianz, wrote on Twitter that the drop was worse than expected and "indicative of the huge economic hit." He added that the second-quarter decline "could be as large as 40 percent."

It is the sharpest drop in GDP since the 8.4 percent decline during the fourth quarter of 2008 in the aftermath of the financial crisis. It is also the first contraction of the economy since the first quarter of 2014, when a sudden decline in GDP was blamed on a cold snap and lower health care spending.

The U.S. economy is not technically in recession, which requires two consecutive quarters of GDP decline. But there is little doubt among economists that the decline will continue, and likely sharpen, in the second quarter of this year.

The BEA said the fall in GDP was down to lower consumer spending, business investment, and exports. The decline was partly offset by housing investment and spending by the federal, state, and local governments.

This is an advance estimate based on a portion of the data and is subject to revisions in either direction once more information is available.

Later on Wednesday, the Federal Reserve's Open Market Committee will make a statement and could announce further stimulus for the economy on top of its massive Treasury purchases and historically-low interest rates.

"The Global Coronavirus Recession has hit the U.S. economy with tremendous force," Greg Daco, chief U.S. economist at the consultancy Oxford Economics, told Newsweek.

"Following 10 years of continuous growth, the longest U.S. economic expansion has ended. And, while the 4.8 percent annualized plunge in real GDP is the sharpest contraction since 2008, it will pale in comparison with the near-40 percent plunge in Q2.

"Looking ahead, we believe the U.S. economy will experience a peak-to-trough contraction of over 12 percent as a result of the coronavirus outbreak–three times the size of the Global Financial Crisis and the sharpest economic contraction since WWII."

Daco said: "The sudden stop in private sector activity will be partially offset by massive public sector spending, worth over $3 trillion, and unprecedented Fed stimulus with firepower of around $4 trillion, but even so, the employment losses will be traumatic, and the rebound post-virus will be very gradual and fraught with pitfalls."

US economy GDP coronavirus
Pigeons fly over closed stores on the Boardwalk in Venice, California on April 26, 2020, amid the "stay at home" order in Los Angeles County due to the coronavirus pandemic. The U.S. economy is in sharp decline. APU GOMES/AFP via Getty Images

Measures to contain the spread of infection, in particular lockdowns, have forced many businesses to shut up shop, their customers and staff stuck at home, and left owners unsure if they will be able to survive until the economy reopens when restrictions are lifted. Similar lockdowns across the world are strangling global demand, hurting U.S. trade.

Since late March, as the coronavirus crisis exploded in the U.S., 26.54 million Americans have filed an unemployment claim. That figure is likely to rise further on Thursday, when this week's claims are added.

The civilian labor force totaled 162.9 million people as of March. The unemployment claims data implies a current jobless rate of around 16.3 percent. The unemployment rate was 3.5 percent in February before rising to 4.4 percent in March as the crisis began.

Congress has passed stimulus packages worth trillions of dollars including bailout loans and grants for struggling businesses, stimulus checks for Americans, and a $600 increase to unemployment benefit.

President Donald Trump unveiled a three-phase plan to lift the restrictions and reopen the economy. The plan is a set of guidelines Trump is encouraging state governors, who are in control of the lockdowns and associated anti-coronavirus measures, to follow.

Health officials are nervous that easing restrictions too early will spark a second wave of infections that will overwhelm medical facilities in worst-affected areas and wear into their limited supplies with devastating consequences.

According to the Johns Hopkins University coronavirus tracker, the U.S. now has more than a million cases, in excess of 58,000 deaths, and nearly 116,000 recoveries from infection with COVID-19, the disease caused by the new strain of coronavirus.

The graphic below, provided by Statista, shows the 10 worst affected states.

coronavirus U.S. states
U.S. states with most COVID-19 cases. Statista

This article was updated with a comment by Mohamed A. El-Erian and Greg Daco.