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The US economy shrank for the first time since 2014 with 4.8% decline vs. 3.5% decline expected in Q1. The coronavirus outbreak has dragged on all aspects of the economy, ending the 11-year period of expansion which was the longest in US history.

Key Takeaways

• The US economy shrank 4.8% vs. 3.5% contraction expected due to the impact of the ongoing pandemic.
• The last time the economy shrank was 2014 which saw contraction of 1.1%.
• The drop marks the steepest contraction since the 8.4% decline seen in Q4 2008.

While some view two consecutive quarters of decline as the definition of a recession, most economists now agree that the US economic recession has been confirmed with the latest GDP report. This is based on the fact that the coronavirus outbreak only began to drag on the US economy in the final weeks of Q1 2020, meaning Q2 will undoubtedly register contraction as well with tens of millions of Americans out of work.

It is also likely that the true impact of the virus outbreak has been underestimated in the Q1 report. Goldman Sachs estimate that the upcoming Commerce Department Revisions to Q1 GDP figures will actually show a decline of 8.25% for the first three months of 2020. This would mean the last three weeks of Q1 2020 may nearly match the worst GDP drop of the entire financial crisis of 2007 – 2009.

BREAKING: US economy shrank by -4.8% in the first quarter -- the biggest decline since the Great Recession (GDP fell -8.4% in Q4 2008)

The worst is yet to come. Q2 2020 expect to be -35%

— Heather Long (@byHeatherLong) April 29, 2020

The first estimate for Q4 GDP initially came in at 3.8% before doubling in the subsequent revision. Accurate data gathering is particularly difficult during this crisis, with the vast majority of Americans under stay-at-home orders. The skepticism surrounding the GDP figures applies in particular to retail sales and durable goods orders figures, which outperformed expectations, leading many to doubt their accuracy.

Expert Outlook

 Goldman Sachs economist Spencer Hill stated “We believe economic reality during the quarter was even worse. Larger than usual revisions to growth data are common in recessions and other periods of high economic volatility.

Reflecting the onset of recession in the US and the scope for additional economic measurement challenges unique to the coronavirus, we believe the wedge between growth data and economic reality is large and rising.”

Market Reaction

Gold prices have weakened following the release of the news. Spot gold last traded at $1,702.78/oz, a flat reading with a high of $1,712.96/oz and a low of $1,700.10/oz. The muted reaction may be on account of the contraction being priced in already, with most analysts expecting a significant decline in GDP for Q1. The markets are waiting for information on the two-day FOMC meeting concluding this afternoon, although no changes to monetary policy are expected.