Record-Long U.S. Expansion to See Its End in First-Quarter GDP

Less than a year ago, the U.S. economic expansion was celebrated as the longest on record. This week its end will become all but official.

Commerce Department figures due Wednesday are projected to show gross domestic product shrank at a 3.8% annualized rate from January through March amid the Covid-19 pandemic and government-mandated lockdowns aimed at preventing its spread. Such a decline would be the steepest since just before the last recession ended in 2009.

And it pales against expectations for the second quarter, with the worst estimate for a previously unimaginable 65% pace of contraction, by far a record in data back to the 1940s. The main economic questions now revolve around the duration of the slowdown and the shape of the recovery as governments gradually lift restrictions on businesses and schools.

Nonetheless, the U.S. figures will go down in history as marking the beginning of the recession — or the peak of the business cycle, in the argot of economists. While a panel of academic arbiters will officially decide the downturn’s start date in a few months, the GDP figures will underscore what’s already clear from government data that show tens of millions of job losses along with plunges in consumer spending and factory output.

“The first quarter turning negative will make it quite clear that the business cycle turned — and a recession started — at some point in the first quarter,” said Michelle Meyer, head of U.S. economics at Bank of America Corp. She estimates a 7% annualized contraction in the January-March period and 30% in the second quarter.

The pandemic has not only wiped out a decade of job gains and a half-century low in unemployment, it’s endangered the benefits that were finally starting to reach neglected parts of the socioeconomic spectrum. The debate at the Federal Reserve shifted almost overnight from how to sustain that improvement to how to keep the economy from crashing further.

Then there are the political implications for the November election and the campaign of President Donald Trump, whose optimism about the strength of the job market and economy were a fixture until recent weeks. The economy grew to $21.7 trillion at the end of 2019, compared with $14.7 trillion at the start of the 2007-2009 recession.

One risk is that the first-quarter U.S. figure will look even worse with revisions in coming months as the government compiles more data, Meyer said, similar to what happened in the prior recession.

“This time, it’s so much more extreme, both in terms of the degree of the contraction and where it’s hitting,” she said.

What Bloomberg’s Economists Say

“A hard stop in the economy in March led to record declines across a broad swath of activities. The magnitude of the monthly drop was so severe that it more than offset solid growth in January and February and pushed the economy into a quarterly contraction, which is accelerating into a record-breaking dive in the current quarter.”

— Carl Riccadonna, Yelena Shulyatyeva, Eliza Winger and Andrew Husby

Click here for the full note.

While two quarters of contraction is considered by most to constitute a recession, the official call in the U.S. is made by the Business Cycle Dating Committee, a panel of economists at the National Bureau of Economic Research. They look at a wide range of indicators including consumer spending, employment and GDP.

But the analysis can take a while. In the last recession, which became the longest since World War II, the committee didn’t make the determination for nearly a year after the downturn started.

Committee members are watching the data but don’t comment on deliberations, said Stanford University economist Robert Hall, who heads the panel.

Speaking for himself, he admitted that “the U.S. economy has suffered a huge adverse blow.”

There’s no debate about that. More than 26 million Americans have filed for unemployment benefits in five weeks, pushing the jobless rate likely to the highest since the Great Depression. The collapse in oil prices worsens the situation, hitting factory production.

The main suspense for the NBER panel is deciding whether the recession began in March as lockdowns started, or if the economy started to trail off in February.

“Based on the weekly data the economy really fell off the cliff in mid-March,” said James Stock, a Harvard University professor and an NBER panel member. He added he would need to see revised data for February and March before reaching a conclusion on a peak in activity.

As for what’s next, Stock said: “I am not optimistic.” He cited the need for extensive coronavirus tests before the economy can return to prior levels.

“Absent widespread random testing data, we could be stuck in a low economic state,” with unemployment above 10% or even above 15% for an extended period, Stock said. “That would be extremely damaging.”

— With assistance by Chris Middleton

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