More countries have released national accounts data for the first quarter. In the US, the advance estimate pointed to a 4.8% annualised rate of decline. That was the largest drop since the depths of the Global Financial Crisis as the impact of ‘shelter at home’ orders across individual US states kept businesses shut and people at home. Private consumption, which accounts for around 70% of GDP, dropped by 7.6%, subtracting 5.3 percentage points from annualised quarterly growth. Investment, which tends to be volatile and is one of the main drags during recession, ‘only’ subtracted 1 percentage point. A collapse in imports helped to improve the overall external position, and net trade added 1.3 percentage points from annualised quarterly growth.
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The downbeat figures are only going to get worse in the second quarter. A wide range of data suggest that the US economy was performing well in the first two months of the year, and so the quarterly decline was entirely due to March effects. We estimate that March GDP must have dropped at a rate of around 20% annualised to be consistent with the overall first quarter figure. Moreover, ‘shelter at home’ orders mostly came in the second half of March, implying even larger declines in GDP for a whole month of lockdown. Nonetheless, monthly data on personal consumption showed a record 7.3% decline in March, highlighting the significant effect those orders had on spending.
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With the severe negative impact of lockdowns increasingly clear, some harbour hope that easing them will lead to a large bounceback in economic activity. There is some merit to that claim. Many recently furloughed and unemployed workers will receive transfers from the US government at or more than their previous income. Indeed, the large drop in March spending came with a large increase in personal savings. The savings ratio spiked by 5.1 percentage points to 13.1%. Meanwhile, consumer surveys remain relatively upbeat about future economic conditions. There is a case to be made about pent-up demand. However, even in states where restrictions are relaxed, there is unlikely to be the supply of goods and services to meet that demand. In Texas, for example, venues will be capped at 25% of previous capacity limits. Moreover, with the spread of coronavirus still ongoing and no effective treatment or vaccine, a large number of people will be unlikely to visit busy places to shop even if restrictions are relaxed. Large fiscal support for those who are unable to work lays the foundations for a future rebound in economic activity. However, any sustainable recovery in spending probably requires an effective health solution. So far, that has yet to materialise.
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