Q1 GDP tanks. But not all parts of the economy were brutalized...yet

Today’s GDP report for the 1st Quarter of 2020 was going to get a lot of attention, as many wanted to see just how much things had dropped off as COVID-19 shutdowns happened all over America in March. And it was a big decline, past the projections of 3-4% from many on Wall Street.

Gross domestic product, which measures the output of goods and services, sank by 4.8 percent in the first quarter on an annualized basis, according to an initial estimate from the Department of Commerce released Wednesday morning.

It's the steepest decline since the Great Recession, which ended in 2009. Economic growth was tracking at or above 2 percent until mid-March.

With most of the nation stuck at home, large swaths of the economy have shuttered, throwing 26 million people out of work. Consumer spending, which drives around two-thirds of economic growth, has plummeted.

The only quarter that has had a bigger drop than 4.8% in the last 38 years was in Q4 2008, as the financial crisis went full-blown and stocks crashed. And the decline was even more stunning because the Atlanta Fed had GDP growth just below 3% for the quarter over the first 2 months of Q1, which indicates a real drop in the neighborhood of 20% for March.

Digging into the actual Q1 GDP report, the main culprit behind the drop was a big decline in consumption. That sector fell by an annual rate of more than $260 billion from Q4 on an inflation-adjusted basis, and cut 5.3% from GDP overall – more than the 4.8% decline over the entire economy.

And you can see where COVID-19 changed people’s spending habits if you look at the breakdown into various sectors. Purchases on discretionary items, entertainment and non-COVID medical services went way down, while consumption of some types of household items actually grew.

University of Michigan Economist Justin Wolfers was especially grabbed by the $110 billion drop in health care spending (annual rate), which helps explain why some Wisconsin health care companies are giving pay cuts and furloughs even while COVID 19 is using up capacity in other areas.

This is stunning: Nearly half of the Q1 decline in GDP can be attributed to healthcare, which is presumably delaying of elective procedures.

It's a strange reality that in the midst of a pandemic, we have a healthcare-led recession. pic.twitter.com/G3IezQkEzX

— Justin Wolfers (@JustinWolfers) April 29, 2020

Even in an otherwise-lousy GDP report, some other areas showed growth in the first 3 months of this year.

Additions to Q1 2020 GDP
Residential homebuilding +0.74%
Government spending +0.13%
Net exports +1.30%

You figure the Bubble in residential homebuilding pops in the coming months, as high unemployment and unstable finances don't lend itself to wanting to make large-dollar investments, so that'll be a drag in Q2. Conversely, the Government number should go up significantly in the next GDP report, due to stimulus checks, higher unemployment payments, and a number of other measures that have started this month and will continue for the near future.

I do have a caveat on that net exports number. As I noted yesterday, that “gain” in net exports is actually indicative of economic troubles, because both US exports and imports went down by a sizable amount at the start of 2020.

Change in dollars, annual rate Q1 2020
Exports DOWN $56.9 billion
Imports DOWN $140.1 billion
Net “gain” $83.3 billion

Looking ahead, 4.8% is likely to be small compared to the double-digit declines that are expected for Q2, even with the extra government spending. And as the Q1 report shows, there were some areas that were largely unscathed in March, and areas such as residential home-building and net exports aren’t likely to give an economic boost in the coming months, as people and businesses change their economic habits.

So what did the stock market think about this brutal GDP report? It zoomed higher!

U.S. stocks rose on Wednesday on some positive data from Gilead Sciences (GILD) on a potential treatment for coronavirus, and a pledge from the Federal Reserve to keep interest rates near zero as long as it is necessary.

The Dow Jones Industrial Average surged 532.31 points to 24,633.86, while the S&P 500 gained 76.12 points to 2,939.51 and the Nasdaq Composite Index rose 306.98 points to 8,914.71....

A study by conducted by the National Institute of Allergy and Infectious Diseases of Gilead’s remdesivir drug met its primary endpoint, raising hopes it could become potential coronavirus treatment. Gilead’s own study showed improvement in patients who took remdesivir to treat the illness.

U.S. stocks rose on Wednesday on some positive data from Gilead Sciences (GILD) on a potential treatment for coronavirus, and a pledge from the Federal Reserve to keep interest rates near zero as long as it is necessary.

Sometimes looking on the bright side of things and hoping for positive things at a later date is good. But being stupidly optimistic and avoiding the horrid reality of the present is a totally different scenario, and it sure seems like a lot of greedheads are choosing ignorance (or crooked arrogance) over thought these days.



Wonder what these momentum traders will be thinking in 3 months when unemployment will still be well above 10%, and consumer spending in a lot of sectors will still be in the tank.