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U.S. GDP Growth – Worst GDP Print Since 2008, Q2 Likely Worse

U.S. Gross Domestic Product (GDP) contracted by 4.8% in the first quarter, marginally worse than economists’ expectations. The decline was largely driven by stay-at-home orders put in place during March. The largest part of the economy, consumer spending, contracted by 7.6% in Q1. Consumption of durables and services detracted 1.2% and 5.0%, respectively, from aggregate GDP. 

Q1 2020 Quarter GDP Report Chart

Business investment contracted for the fourth straight quarter. The Q1 decline was almost twice as large as any of the three prior quarters. As expected, businesses slashed structural and equipment related spending in response to COVID-19. The bright spot was investments in software as data center and networking capacity grew during the quarter.

Residential (housing) investment grew 21% (annualized) in the quarter and contributed 0.75% to GDP. The strong housing growth likely benefited from an early spring selling season and historically low interest rates.

Net exports contributed 1.3% to GDP. We do not believe this is sustainable going forward. Breaking down the net exports figure, the 15% decline in imports outweighed the 9% decline in exports. Most of this decline is due to the COVID-19 pandemic impacting supply chains. 

Lastly, government spending grew at a modest 0.7% rate. This is noticeably less than the prior four quarters. Transfer payments and unemployment benefits do not flow through to this section but would show up under personal consumption when consumers spend the benefits they receive. 

Although Q1 GDP was rather ugly, Q2 will likely be much worse. Q2 will capture the depths of the COVID-19 stay-at-home orders. The silver lining is that both the legislative and executive branches of government along with the Fed have taken remarkable steps to backstop the economy. This likely removed some of the worst-case scenarios from possibility. While the economic numbers will be bad for a while, looking at the incremental changes in data points rather than their absolute levels will be important going forward. A shift from bad and weakening data to bad and improving will signal the recovery is starting.

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