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University of Notre Dame

Massive decline in first quarter GDP signals much worse lies ahead, Notre Dame expert says

29-Apr-2020 3:00 PM EDT, by University of Notre Dame

On April 29, the U.S. Department of Commerce announced the economy shrank at a 4.8 percent annual rate in the first three months of 2020 — the first quarterly contraction since 2014 and largest since the Great Recession amid the coronavirus pandemic.

This news is nothing compared with what is to come, according to economist Jason Reed, assistant chair and teaching professor of finance at the University of Notre Dame's Mendoza College of Business.

"Don’t let the headlines fool you; it was much, much worse,” Reed said. “The decline in quarter one GDP was expected, and it really signals what is to come. We should think of this decline as a barometer for next quarter. The pressure is dropping, a storm is coming.”

Because state quarantines began in mid-March and there was still an annualized decline of 16 percent in durable consumer purchases along with a 10 percent drop in service spending, Reed says evidence points to the economy growing through February, which means the March decline was overwhelming.

“Make no mistake, we’re all expecting Q2 to be much worse,” Reed said. “How much worse still depends on the fiscal response from both Congress and the White House. We have yet to roll out full scale testing, additional unemployment and small business insurance, and to top it off, the fiscal authorities are debating which states should go bankrupt.

“A lot of recent talk has revolved around the shape of the recovery. At this rate, the start of the recovery is still far off. We really should be talking about how deep this downturn can go."




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