The US economy contracted 5% year on year in the first quarter


WASHINGTON (AP) – The US economy has contracted at an even faster rate than initially estimated in the first three months of this year, with economists continuing to expect a much worse result in the current quarter from April to June.

The Commerce Department reported on Thursday that gross domestic product, the broadest measure of economic health, fell at an annual rate of 5% in the first quarter, a larger drop than the 4.8% drop initially estimated. a month ago.

It was the largest quarterly drop in more than a decade, since falling 8.4% in the fourth quarter of 2008 at the height of the financial crisis.

The lower GDP revision in the first quarter reflected lower investment by businesses in their inventories, which was partially offset by slightly higher consumer spending.

Economists believe the lockdowns that have shut down large swathes of the economy and triggered the layoffs of millions of workers will cause GDP to fall at an annual rate of 40% in the current quarter. This would be the largest quarterly drop on records dating back to 1947. It would be four times the size of the previous drop in 1958.

Many forecasters believe growth will rebound strongly in the July-September quarter, with the Congressional Budget Office forecasting that GDP will grow at an annual rate of 21.5%. However, this gain would not be enough to compensate for the economic output lost in the first and second quarters.

And many economists fear that the positive GDP performance expected for the second half of the year may not materialize if current efforts to reopen the economy do not go well. If the easing of stay-at-home rules results in a second wave of coronavirus, it could be a serious setback for efforts to get consumers to shop in stores and eat in restaurants again.

Sung Won Sohn, professor of business and economics at Loyola Marymount University in Los Angeles, said he expected GDP to grow at an annual rate of around 9% in the third quarter and 15% in the fourth quarter. of this year if there was no second wave of the virus.

But he said that even with these gains, GDP for the whole year will be down 5.3%. Sohn said it will take years to make up for lost GDP, noting that it has taken the economy more than six years to return to where GDP output was before the start of recent years.

The Trump administration, which relied on a strong economy to boost President Donald Trump in his battle for re-election, spoke of the rebound coming.

Calling it a “transition to greatness,” the president sees strong growth in the second half of the year.

“You’re going to see some good numbers in the fourth quarter, and you’re going to end up having a great year next year,” Trump said recently.

But Sohn and other economists say the economy is unlikely to achieve sustained GDP gains until a vaccine is found and widely available, which could still take a year or more.

“I think there’s a good chance there is a second wave of the virus,” Sohn said. “Just because we have a vaccine doesn’t mean we’ll stop the virus in its tracks because of the time it will take to get people vaccinated. “

Thursday’s GDP report was the second of three estimates for the first quarter. The 5% drop follows a 2.1% year-on-year gain in the fourth quarter of last year.

For the first quarter, consumer spending, which accounts for 70% of economic activity, fell at an annual rate of 6.8%. It was the largest quarterly decline since an 8.7% drop in the second quarter of 1980, but it was still a slight improvement from the government’s first estimate of an even larger drop. 7.8%.

Firms’ decisions to slow down inventory restocking slashed first-quarter GDP by 1.4 percentage points, three times the original estimate of a 0.5 percentage point decline due to restocking cuts.

Business investment in new factories and equipment declined at an annual rate of 7.9% in the first quarter, a slightly smaller decline than initially reported, while residential construction increased at a rate of 18.5% , slightly slower than expected.

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