1Q20 GDP: Consumption Contracted Even More Quickly

Bottom Line: After tracking in the 2-3% range for the first two months of the quarter, the economy took an enormous hit due to the shutdowns for the novel coronavirus. Consumption tumbled 7.6% annualized for the entire quarter, sharply worse than expected. The overall hit of -4.8% should be taken in perspective -- GDP is typically quoted in annualized quarter-over-quarter terms. The annualization of such a dramatic shock makes for large figures. That said, the shock came mostly in the last two weeks of the quarter. While consumption fell rapidly in those two weeks, residential and business fixed investments were still substantial, with cutbacks in those sectors coming later into the shutdowns. These data suggest 2nd Quarter consumption started even weaker than previously thought. Early forecasts for 2nd Quarter GDP suggest -20 to -30% annualized growth. On the plus side, our nowcasting models suggest consumption bottomed in mid-April. Still, the scale of the hit to economic growth is shocking and suggests it will be well into 2021 at the earliest before the economy recovers to pre-covid levels. Gross Domestic Product FELL by 4.8% in the 1st Quarter, lower than market expectations for a decrease of 4.0%. Economic activity is still 0.3% ABOVE its year-ago level and 26.6% ABOVE its pre-recession 2007 Q4 cyclical peak.

• Inventory Investment FELL by $29.4 billion, subtracting 0.53 percentage points from overall economic activity. Consequently, Real Final Sales FELL by 4.3% and is now 0.9% ABOVE its year-ago level.
• Imports FELL by 15.3% and Exports FELL by 8.7% so Net Exports ROSE by $83.3 billion. This implies that Real Final Domestic Demand FELL by 5.4% and is now 0.4% ABOVE its year-ago level.
• Consumer Spending FELL by 7.6%, subtracting 5.26 percentage points from economic growth.
• Business Investment FELL by 8.6%, subtracting 1.17 percentage points to GDP. Intellectual property products increased by 0.4% while non-residential structures declined by 9.7%.
• Residential Investment ROSE by 21.0%, adding 0.74 percentage points to economic growth.
• Finally, Government Purchases ROSE by 0.7%, adding 0.13 percentage points to GDP.
• The GDP Price Index ROSE by 1.3%, compared withmarket expectations of 1.0%. This is also 1.7% ABOVE its year-ago level.