Last week, the Bureau of Economic Analysis released the preliminary report of gross domestic product (GDP) for the first quarter of 2020, showing, to no surprise, that the decade-long expansion of the U.S. economy came to an abrupt end in March. GDP contracted at an annualized pace of 4.8% during the quarter, driven largely by a 7.6% decline in personal spending. Exports dropped 8.7%, while imports fell 15.3%, leading to the smallest trade deficit since 2016. Business spending declined 5.6%, while government spending provided the only area of growth, albeit a scant 0.7%.
These quarterly figures only capture March data, and the slowdown has clearly continued and accelerated into April. A more frequent measure of economic activity created by the New York Federal Reserve Board illustrates this continued slump. The index in the nearby graph is a compilation of high-frequency data, such as unemployment claims, retail sales, consumer confidence, steel production, electricity output, railroad traffic, withholding tax collections and so forth. This data is then translated into a comparable annual GDP growth rate on a weekly basis.
This Weekly Economic Index (WEI) ended March at -6.8% and has subsequently dropped to -11.6% as of the last week of April. It is important to note that, by convention, economic data is usually expressed as an annualized rate. The first quarter’s 4.8% decline in GDP does not mean that the size of the economy fell by 4.8%, but rather that the pace of activity in the first quarter, if maintained for a full year, would equate to a 4.8% contraction. The WEI follows the same methodology. The last reading of -11.6% indicates a pace of activity, not a period-to-period change. In periods of normal economic fluctuation, this is a distinction without a real difference, but given the volatility of economic data at present, the annualization methodology can be misleading.
Economies don’t normally fluctuate to this degree. Quarterly economic growth (again, at an annual rate) since 1947 has averaged +3.2%, with a standard deviation of 3.8%. Or, in English, about two-thirds of the time GDP growth falls within a range of -0.7% to +7.0% (the shaded portion on the nearby distribution graph). We will clearly be living in the tails of this distribution for the next few quarters, both on the downside and the upside.
There are early signs that braver consumers in states that have begun to reopen are wandering out of their homes and spending money. In the early days of the pandemic, we followed the year-over-year change in restaurant bookings on OpenTable.com as a near real-time indicator of how quickly various parts of the country were shutting down. Reservations throughout the country fell 100% in mid-March as states imposed mandatory closures of nonessential businesses. It is perhaps an exercise in extreme optimism to observe that not all cities remain at -100% restaurant activity. We note with interest that several cities in Texas (Dallas, Houston, Austin and San Antonio), as well as Atlanta, are no longer down 100%. To be fair, restaurant activity in these cities is still down about 90% vs. last year, but this perhaps represents the beginning of a much-needed rebound.
It will take years for the U.S. economy to return to some semblance of normality, and the new normal will be forever altered by lessons learned during the COVID-19 crisis. We’re still in the middle of it. The economic toll will continue to mount, but investors should remain focused on the future and the ability of the companies in their portfolios to survive the current environment while preparing to thrive in the environment to come.
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