US GDP shrank 4.8% in the first quarter amid biggest contraction since the financial crisis

Gross domestic product fell 4.8% in the first quarter, according to government numbers released Wednesday that provide the first detailed glimpse into the deep damage the coronavirus wreaked on the U.S. economy.

Economist surveyed by Dow Jones had expected the first estimate of GDP to show a 3.5% contraction.

This marked the first negative GDP reading since the 1.1% decline in the first quarter of 2014 and the lowest level since the 8.4% plunge in Q4 of 2008 during the worst of the financial crisis.

The biggest drags on the economy were consumer spending, nonresidential fixed investment, exports and inventories. Residential fixed investment, which jumped 21%, along with spending from both the federal and state governments helped offset some of the damage. Federal spending was up 1.7%.

Consumer expenditures, which comprise 67% of total GDP, plunged 7.6% in the quarter as all nonessential stores were closed and the cornerstone of the U.S. economy was taken almost completely out of commission. Durable goods spending tumbled 16.1% while expenditures on services were down 10.2%.

Exports dropped 8.7% while imports fell 15.3%, including a 30% drop in services.

The count of all goods and services produced in the U.S. shows that even though the first quarter saw only two weeks of shutdown, the impact was pronounced and set the stage for a second-quarter picture will be the worst in the post-World War II era.

Goods consumption fell 1.3% while services slumped 10.2%.

“The upshot is this was already an economic catastrophe within two weeks of the lockdowns going into effect,” said Paul Ashworth, chief U.S. economist at Capital Economics. “The second quarter will be far worse.”

Markets, however, showed little reaction to the numbers. Instead, Wall Street focused on positive news from Gilead, which reported that testing on its coronavirus treatment drug remdesivir showed positive results. The Dow opened higher by about 400 points.

“The markets are going to very much look through the first-quarter GDP data,” said Katie Nixon, chief investment officer at Northern Trust Wealth Management. “We know it’s bad. The magnitude is almost irrelevant now as we’re looking at a much steeper decline in second-quarter activity.”

Most economists see the U.S. in recession already even though the technical definition is generally two consecutive quarters of negative growth. The fourth quarter of 2019 saw GDP rise 2.1%.

That view is largely because the first-quarter numbers only include a few weeks of the economic shutdown brought about by the coronavirus, and even at that probably underestimate the real damage.

The Bureau of Economic Analysis itself pointed out in a technical note that the initial reading was probably inaccurate.

The coronavirus lockdown “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. The full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the first quarter of 2020 because the impacts are generally embedded in source data and cannot be separately identified,” the bureau said in a statement.

When the Commerce Department makes its revisions to the initial GDP reading, the result could show a decline of about 3 to 4 percentage points for a total slide of 8.25%, according to a Goldman Sachs estimate.

During the financial crisis, for instance, the first estimate for Q4 2008 was a drop of 3.8%, which more than doubled by the time the government went through all the numbers. One issue is that with most businesses closed – Citigroup estimates 95% of GDP is under stay-at-home orders – it was difficult to get accurate numbers on the movement of goods and services.

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

Specifically, retail sales and durable goods orders for March that weren’t as bad as feared also could indicate some issues with data gathering.

“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,” Hill wrote.