Economy Declines in First Quarter

An economic recession is defined as at least two consecutive quarters of negative economic growth. Given last week’s first quarter growth estimate from the Bureau of Economic Analysis (BEA), it appears the U.S. economy will enter a recession in 2020.

Last week’s advance estimate of first quarter economic growth showed U.S. real gross domestic product (GDP) shrunk 4.8 percent compared to the final quarter in 2019. The decline in GDP was lower than many economists had projected. Most economists project second quarter GDP will decline between 12-15 percent. So, it seems a recession is around the corner.

This year’s economic downturn is unique in that it is not due to a fundamental economic weakness, but a public health concern. The economy was performing well prior to the COVID-19 outbreak. GDP rose 2.1 percent in the last quarter of 2019 and unemployment numbers were near record lows. As such, economists expect the economy to rebound but the question is how quick and how robustly. How quickly will consumers return to their favorite restaurants? Will there be a second wave of infections? How quickly will supply chains recover?

The latest Congressional Budget Office (CBO) forecast shows third and fourth quarter growth of 5.4 percent and 2.5 percent respectively and an overall annual decline in 2020 of 5.6 percent. The International Monetary Fund (IMF) projects an annual decline this year of 5.9 percent. Most other projections are in that range as well. The positive news is economists expect economic growth to rebound in 2021. The CBO projects a growth of 2.8 percent and the IMF projects 4.7 percent for the U.S. economy. A rebound will occur, it’s just a matter of timing.

Figure 1. Real GDP: Percent Change from Previous Quarter

Source: U.S. Bureau of Economic Analysis