US GDP growth slowed in the second quarter of 2019 before stabilising at about 0.5% per quarter. At the same time, US bond yields suggested future growth rates would be below trend. The US Fed agreed and it reduced its federal funds range three times in the second half of 2019 as a form of insurance against a softening economy. However, the Fed’s actions at the time did not take into account the restrictions which would be placed on US residents in response to the COVID-19 pandemic. These restrictions began to bite in March 2020 and US economic activity consequently seized up.
The US Commerce Department has just released March quarter “advance” GDP estimates and they indicate the US economy contracted by 1.2% for the quarter or at an annualised growth rate of 4.8%. The figure was lower than the -1.0% (-4.0% annualised) which had been expected and it represented a sharp reversal from the December quarter’s final figure of 0.5%.
NAB economist Tapas Strickland said, “Of course, the worst is yet to come with expectations that Q2 GDP might fall by around 30-40% annualised.”
US GDP numbers are published in a manner which is different to most other countries; quarterly figures are compounded to give an annualised figure. In countries such as Australia and the UK, an annual figure is calculated by taking the latest number and comparing it with the figure from the same period in the previous year. The diagram above shows US GDP once it has been expressed in the normal manner, as well as the annualised figure.