The US economy has largely stopped due to pandemic coronavirus, showing the worst results in more than a decade in the first quarter of 2020, but the dismal results reflect only a small part of the upcoming damage, writes USA Today.
Gross domestic product (value of all goods and services produced in the US), declined a seasonally adjusted annual rate of 4.8% in the period from January to March, as consumer and business spending has fallen sharply, said on Wednesday the U.S. Commerce Department. It was the first fall since the beginning of 2014 and the coolest since the end of 2008, the period of the great recession.
Economists polled by Bloomberg, predicted a decline in GDP of 3.8%. The country is almost certainly already mired in a deep, though probably short of a recession, the newspaper notes.
The contraction in the first quarter probably reflects only a portion of the actual reduction, because the initial assessment usually miss some data, and these gaps are amplified during major economic shifts, certain investors in Goldman Sachs.
In the first quarter, the economy was stable, until in mid-March, most States began to close “non-essential businesses” such as restaurants, shopping centres, cinemas and sports halls, to reduce the spread of the virus. The closure of businesses has exacerbated the problem, reflected on the tourism industry, which has nearly stopped, when Americans stopped flying in planes and living in hotels.
According to Moody’s Analytics, about 30% of the us economy is closed. About 10 million Americans in industries directly and indirectly lost their jobs in March, which further reduced consumer spending in the first quarter.
May be fired up to 25 million Americans and another estimated 20 million people will face reduced hours or wages, according to Moody’s. The unemployment rate, which rose from a half-century low of 3.5% in February to 4.4% in March, expected to grow to 15-20% in April — it will be the highest rate since the great depression.
As a result, most of the economic impact of layoffs and plant closures will end in the current quarter. It is expected that economic growth will be reduced by 24.5% yoy, according to economists surveyed by Wolters Kluwer’s Blue Chip Economic Indicators. Research firms such as Nomura, expect the decline will be 40%, the biggest since the 19th century.
Congress issued about $ 3 trillion on a program to minimize the damage. Among other measures, legislators increased the size of unemployment benefits and offered soft loans, which cover 8 weeks of salary and other costs for businesses employing less than 500 people. The Federal reserve also developed a software package to support lending to businesses and households.
Analysts, in turn, expect that the economy will begin to recover by the summer, if we assume that the outbreak of coronavirus continued to decline, and more and more States allow businesses to open again. Such States as Georgia, South Carolina and Tennessee, already restart its economy.
Economists polled by Wolters Kluwer, it is expected that in the second half of the year the economy will grow around 7.5% and in 2021 3.8%. Despite this, it is expected that many consumers will be cautious and will avoid places of social gathering as long as the vaccine will not be available maybe next year. Economists don’t expect the economy will return to its pandemic level to the end of 2021.
Consumer spending fell sharply
Consumer spending fell by 7.6% — the biggest drop in 40 years — after rising 1.8% in the fourth quarter. American buyers were in good financial shape before the outbreak of the coronavirus. But the sudden closure of most businesses on customer service, combined with millions of lay-offs has dramatically reduced the number of purchases. Consumer confidence, which could presage costs fell sharply in April to its lowest level in 2014. Consumption is about 70% of economic activity.
Business investment decreased dramatically
Business investment fell 8.6% after falling 2.4% in the fourth quarter, the first increase since 2009, when such spending declined four quarters in a row. The cost to businesses has been limited against the background of a trade war, President trump with China last year.
Any increased optimism after the trade agreement Phase 1 between the United States and China in January was overwhelmed by the pandemic. The company has no reason to buy new factory equipment and computers to increase production, if consumers do not spend money. The purchase of such equipment fell by 15.2%, while spending on construction fell 9.7%, partly due to the fall in oil prices, which prompted producers to close drilling rigs.
Do not hurry to make stocks
Companies increased inventories at a much slower pace. At the beginning of 2019 many companies have increased their reserves, trying to evade tariffs trump on Chinese imports, reducing the need to replenish these supplies. Coronavirus further weakened the accumulation, significantly reducing consumer demand. Stocks inhibit growth for four consecutive quarters.
Investing in residential real estate values
The construction of new homes and apartments for one family, and repairs increased by 21%, after rising 6.5% in the previous quarter. The average 30-year fixed mortgage rates fell to 3.3% from 4.2% a year ago, which led to the purchase and construction of housing. This helped to compensate for the shortage of workers and available land. But construction of homes is expected to fall in coming months because of a pandemic.
Trade growth slowed
US exports fell by 8.7%, but imports fell almost twice as fast — 15.3% of because of failures in the supply chain in China and reduced demand from American consumers.
Public spending has grown
Federal, state and local spending rose 0.7 percent after increasing 2.5 percent in the fourth quarter. Federal spending grew by 1.7% and should become a much more significant factor in growth in the second quarter in light of the significant costs of Federal assistance in connection with the coronavirus.
It was a gloomy report, but it just reflects the early impact of the pandemic, with the worst damage foreseen in the current quarter. During the recession the economy is likely to shrink by 12% — three times more than the fall during the great recession, says economist from Oxford Gregory Dako.
However, this recession lasted 18 months, while the current recession is expected to cause the damage in the first half of the year, before a recovery will begin in the third quarter.
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