U.S. Economy Shrinks at 4.8% Pace, Signaling Start of Recession

(Chart: Bloomberg)

The record-long U.S. economic expansion is over after almost 11 years, with the deepest recession in at least eight decades now under way.

The world’s largest economy shrank at a 4.8% annualized pace in the first quarter, the biggest slide since 2008 and the first contraction since 2014, as the need to fight the coronavirus forced businesses to close and consumers to stay home.

The downturn, reported Wednesday by the Commerce Department, was led by the steepest drop in consumer spending since 1980 and the fastest decline in business investment in almost 11 years.

The worse-than-expected report reveals the wide-scale hit to U.S. output from Covid-19 and the subsequent freezing of economic activity.

The current quarter is likely to be far worse, with analysts expecting the economy to tumble by a record amount in data going back to the 1940s. Bloomberg Economics has projected a 37% annualized contraction, but UniCredit is the most bearish with a 65% estimate.

Crisis, Recovery

That will end an expansion that began in mid-2009 when the economy began to recover from the financial crisis. Since then, gross domestic product swelled by $7 trillion and unemployment had fallen to a five-decade low of 3.5%, although some have questioned how widely the benefits have been spread with an increasing concentration of wealth at the top and wages rising at a relatively tepid pace for most of the expansion.

The pain is being felt worldwide with China already reporting a sharp decline in output and the euro-area set to deliver grim figures Thursday.

As the U.S. government and states debate when and how fast to lift restrictions on companies and schools, there remains considerable doubt over the duration of the economic slowdown and the shape of the recovery.

Early hopes for a rapid rebound have faded with most analysts assuming a jump in activity once the virus passes will be followed by a slower resumption of growth. So far, many data points signal a deepening contraction, while others have shown slight improvement, according to a Bloomberg Economics tracker.

Consumers Wary

Despite massive government aid packages and near-zero interest rates, businesses big and small risk going bankrupt, while consumers may remain wary of hitting shops and restaurants amid health concerns, higher debt burdens and job insecurity.

Another big question is how the recession affects the re-election chances of President Donald Trump, who lately has been pushing for removal of the constraints after losing the ability to run on a strong economy.

At the Federal Reserve, which slashed rates and rolled out a slew of emergency and unprecedented lending programs, Chairman Jerome Powell and colleagues are trying to limit the virus’s damage to jobs and business while setting the conditions for recovery.