By Perc Pineda, PhD

Chief Economist

The advance estimate of gross domestic product (GDP) for the first quarter by the U.S. Bureau of Economic Analysis confirms the end of the longest economic expansion in U.S. history. The U.S. economy contracted 4.8% in the first quarter on a seasonally adjusted annual rate. This resulted in U.S. actual output to be lower than potential output or an output gap of $209.7 billion. Since the first quarter of 2018, U.S. output had exceeded its potential.

While the estimate is subject to revisions, the coronavirus lockdown in March shaved off $234.1 billion of U.S. economic output in the first from the fourth quarter. Personal consumption expenditures dropped 7.6% and business investment spending further slowed by 5.6%. While in 2019 household consumption buoyed U.S. economic activity as business spending slowed—due to trade-related uncertainties—this year’s first-quarter data reflects the pessimism of both household and business sectors of the U.S. economy.

Consumer confidence fell from 101.0 in February to 89.1 in March, based on the University of Michigan’s index of consumer sentiment. Consumption of goods and services fell 1.3% and 10.2%, respectively. Durable goods consumption dropped 16.1%, while nondurable goods consumption rose 6.9%. From a year ago, personal consumption expenditure rose a meager 0.4.%. Consumption of durable and nondurable goods rose 1.3% and 4.1%, respectively from a year ago. Consumption of essentials such as food and beverage, which uses significant amounts of plastics packaging, was 8.2% higher than the first quarter last year.

While disposable personal income rose 1.9% in the first quarter owing to decent January and February labor market, it was weaker than the 3.0% increase in the fourth quarter. As consumers pulled back in the first quarter, personal saving as a percentage of disposable personal income was 9.6% in the first quarter—above the 7.6% rate in the fourth quarter. The personal savings rate will continue to rise until signs of an economic turnaround are visible. It is unlikely that we will see a turnaround in consumer confidence in the second quarter judging by the weekly unemployment insurance claims that remain high. April consumer sentiment index further dropped to 71.8 as the unemployment rate is expected to increase in the second quarter.

Business investment spending fell 5.6% in the first quarter. Investment spending on equipment decreased the most with 15.2%. Industrial equipment spending decreased 7.1%—less than 12.6% in the fourth quarter. Moving forward, growth in business investment spending hinges in most part on business expectations. In March, business expectations fell from 103.9 in February to 83.7 based on the Business Expectations Index of the Federal Reserve Bank of Atlanta, which reflects companies’ expectations about the sales growth, employment, and capital expenditure over the next 12 months. The current reading of April’s business expectation is significantly lower at 47.7.

Will consumer and business outlook change? The short answer is yes, but with a caveat that household and business sector sentiments will shift along with the pace of the reopening of the economy. It is expected that U.S. economic output will continue to contract in the second quarter. Current estimates including that of PLASTICS show that the largest adverse impact of the coronavirus will be in the second quarter. Considering that the U.S. plastics industry is a mature industry, its growth this year will track economic growth or GDP. The plastics industry primarily supports the manufacturing sector. So far, the services sector of the economy experienced a greater decline than the goods sector in the first quarter. The current economic slowdown is global affecting all countries. It is currently projected that an economic turnaround will start in the third quarter. However, the pace and timing of output recovery are expected to vary between countries and by industries.