Economy Shrinking More Than Expected

JM Ashby
Written by JM Ashby

In a possible sign that second quarter results will fall toward more pessimistic estimates, economic growth during the first quarter of the year abruptly cratered before significant portions of the country issued stay-at-home orders.

Rather than growing at a rate of about 1.2 percent as predicted before the pandemic struck, the economy shrank by nearly 5 percent in the first quarter ending in March.

The collapse in the U.S. economy caused by the coronavirus pandemic triggered the biggest drop in gross domestic product in the first quarter since 2008 in a prelude to an even more massive decline in the spring. GDP, the official scorecard for economic growth, shrank at a 4.8% annualized pace.

GDP, the official scorecard for the economy, shrank at a 4.8% annualized pace from the beginning of January to the end of March, the government said Wednesday. Economists polled by MarketWatch had forecast a 3.9% decrease.

A significant portion of this contraction can be attributed to plummeting consumer demand and, interestingly, a large chunk of it is a result of reduced spending on health care according to the Commerce Department.

It may not immediately make sense that we started spending so much less on health care with a pandemic on the loose, but the reduction is apparently a result of cutting off elective or unnecessary procedures, among other things.

What is or is not considered a necessary procedure is dubious in many cases, with some Republican-controlled states declaring that abortion is unncessary, but suffice to say Americans normally spend a lot of money on something that clearly shouldn't be as expensive as it is. That so much of our economy or economic growth consists of bloated health care bills tells me things are wildly out of proportion; perhaps even more so than we already knew.

A global reduction in consumer demand was going to hit our economy in any case even if Trump responded to the pandemic in exactly the manner that he should have, but he obviously didn't do that. Things are worse than they had to be because of Trump and the economy is expected to shrink anywhere from 25 to 40 percent, depending on who you ask, during the second quarter. Even the best estimates are still horrific.

Second quarter figures won't be available until July.

  • muselet

    Kevin Drum has thought about this, too, and rightly says the size and timing of the slowdown implies the economy was on the brink of recession before the business shutdowns.

    He goes on to repeat that this doesn’t feel like a typical recession, and he’s right. The cause of the drop is known and government aid is in the works, and we’re just cooling our heels until Covid-19 is a less immediate threat.

    Drum concludes:

    Our fear right now isn’t truly economic, it’s fear of the virus. This means we can still get out of this with only moderate damage if we handle the pandemic itself properly.


    • Tony Lavely

      “if we handle the pandemic itself properly”

      And when should that have started? Asking for a friend.