First Quarter GDP Revised Down to 5% Contraction

WASHINGTON, DC - JANUARY 17: A store displays an American flag and formal wear ahead of inauguration ceremonies for President-elect Donald Trump on January 17, 2017 in Washington, DC. Trump will be sworn in as the 45th U.S, president on January 20. (Photo by Mario Tama/Getty Images)
Photo by Mario Tama/Getty Images

The American economy shrank by five percent in the first three months of the year, worse than the 4.8 percent initially reported.

The Commerce Department’s second estimate of gross domestic product for the first quarter of 2020 showed the economy shrank at a 5 percent seasonally adjusted annualized rate despite the economy running strong in both January and February. But shutdown orders and social distancing caused a sudden halt to much economic activity in March, sending the economy into contraction.

Economists had forecast the second estimate to come in at 4.8 percent.

Consumer spending and capital spending came in better than initially reported but investment in business inventories shrank by more, pushing down the overall GDP number. The Commerce Department said in its second estimate that private, nonfarm inventories subtracted 1.52 percentage points from GDP, up from the 0.63 percent in the first estimate.

A recession is typically defined as two consecutive quarters of contraction in GDP. The economy is expected to shrink at nearly a 40 percent annualized rate in the April through June quarter.

The U.S. reports GDP as an annualized rate of change rather than the quarter-to-quarter basis that most countries use. That can result in single quarter changes appearing to be much bigger than changes reported in other countries. Measured by the international standard, the U.S. economy contracted by around 1.3 percent.

Consumer spending fell at a seasonally adjusted 6.8 percent seasonally adjusted annualized rate, a smaller decline than the 7.6 percent reported in the Commerce Department’s first estimate.

Corporate profits were down sharply. After-tax corporate profits fell 11.1 percent compared with the year-ago period. Compared with the fourth quarter, after-tax profits fell 15.9 percent.

Business investment was weak in the first quarter but not as weak as initially reported. Fixed nonresidential investment fell at a 7.9 percent annual rate, better than the 8.6 percent contraction reported in the first estimate.


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