2Q GDP Revised Down to -5%

Real gross domestic product decreased at an annual rate of 5 percent in the first quarter, according to the second (revised) estimate by the Bureau of Economic Analysis, down from 4.8 percent in last month’s advance (first) estimate. It also reported corporate profits fell sharply in the first quarter as the impact of the coronavirus pandemic took hold.

By contrast, in the fourth quarter, real GDP increased 2.1 percent before the effects of the coronavirus pandemic began to be felt. And analysts warned “the worst is yet to come” in subsequent quarters as the full effects of the coronavirus economy kick in.

BEA said with the second estimate, a downward revision to private inventory investment was partly offset by upward revisions to personal consumption expenditures (PCE) and nonresidential fixed investment.

The report said the decline in first quarter GDP reflected the response to the spread of COVID-19, as governments issued “stay-at-home” orders in March. “This led to rapid changes in demand, as businesses and schools switched to remote work or canceled operations, and consumers canceled, restricted, or redirected their spending,” BEA said. It added the full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the first quarter because the impacts are generally embedded in source data and cannot be separately identified.

BEA said the decrease in real GDP in the first quarter reflected negative contributions from PCE, private inventory investment, nonresidential fixed investment and exports that were partly offset by positive contributions from residential fixed investment, federal government spending and state and local government spending. Imports, a subtraction in the calculation of GDP, decreased.

The report also said profits from current production (corporate profits with inventory valuation and capital consumption adjustments) decreased by $295.4 billion in the first quarter, compared to an increase of $53.0 billion in the fourth quarter.

Profits of domestic financial corporations decreased by $67.4 billion in the first quarter, compared to an increase of $0.7 billion in the fourth quarter. Profits of domestic nonfinancial corporations decreased by $169.5 billion, compared to an increase of $53.7 billion. Rest-of-the-world profits decreased by  $58.6 billion, compared to a decrease of $1.4 billion. In the first quarter, receipts decreased $72.7 billion, and payments decreased $14.2 billion.

“The weaker GDP estimate came from a larger drawdown in inventories than previously reported,” said Jay Bryson, Acting Chief Economist with Wells Fargo Securities, Charlotte, N.C. “Elsewhere, there were only modest revisions to the underlying components, which continued to display steep declines.”

Bryson also had a stern warning. “This report, however, is only a taste of what to expect in Q2, when we forecast GDP to nosedive at an annualized rate of 25%,” he said. “Weak U.S. production and personal consumption weighed on corporate profitability in Q1, but as with GDP, the second quarter will be much worse for corporate profits.”