Broker Check

US Economy Contracts in the First Quarter

June 11, 2020

The US economy contracted at a 5 annualized pace in the first quarter according to the Bureau of Economic Analysis. The decrease in economic activity came as no surprise as the Coronavirus and the economic restrictions that were put in place to combat it were expected to weigh heavily on the US and global economy. However, the report does offer some insight into the areas that are being hit hardest.

Personal consumption expenditures, which is the largest component of US economic output making up roughly two-thirds of economic activity, decreased at an annualized rate of 6.8% to start the year. The decrease is largely due to a 9.7% decrease in the purchase of services as many services cannot be provided in a world of social distancing. In addition, the purchase of durable goods (those goods expected to last longer than a year) also decreased 13.2%. Meanwhile, nondurable goods reported a 7.7% increase and many people are still able to purchase these goods online.

Business investment also decreased sharply reporting a 10.5% annualized contraction in the first quarter. Much of this is due to a decrease in business equipment. Yet somewhat surprisingly investment in residential structures in-creased 18.5% for the quarter.

Meanwhile, trade activity has helped to support growth as exports decreased at roughly half the rate of imports.

Lastly, government expenditures increased just 0.8% as most of the pro-grams designed to combat the impact of the Corona-virus were passed at the end of the first quarter but were not implemented until the second quarter. Now the question is how much personal and business spending is likely to contract in the second quarter and whether government spending will be able to cushion the blow to the US economy.