US economic growth slowed more sharply in Q1 2020 than we had anticipated, down 4.8% at an annualized rate, as did tech investment. The US Bureau of Economic Analysis’ Q1 2020 GDP report released this morning, Gross Domestic Product, 1st Quarter 2020 (Advance Estimate), also showed big drops in durable goods consumption, such as autos (-16% at an annualized rate), services consumption (-10%, with recreation, transportation services, and food and accommodation down at 25% to 30% rates), business investment in equipment (-15%), and business investment in construction (-10%). Exports fell at an 8.7% rate, but imports (especially services like tourism) dropped at a 15% rate. Consumer spending on nondurable goods rose at a 7% rate as consumer stockpiles of food and groceries outstripped cutbacks in clothing. Housing investment was positive, as was federal government spending.
The news for the tech market was mixed. Business investment in computers was down 8.3% from Q1 2019 (-30% at an annualized rate from Q4 2019), and communications equipment investment was down 13% on the same basis (-20% annualized from Q4 2019). But software investment held steady, up 7% from a year ago (5.2% annualized from the prior quarter). These patterns are consistent with our expectations, though the declines were steeper than we had assumed.
It is worth remembering that the first two months of Q1 2020 were actually pretty decent from a growth perspective, so both the economic and tech investment declines reflect the steep pullbacks in March when the federal and many state governments imposed pandemic containment measures. Q2 2020 data is going to be even worse, with at least two and potentially three months of weak consumer spending and business investment. Plans announced to start easing business closures and social distancing requirements are cautious and staged and could be reversed if COVID-19 hospitalization and death rates spike. Even then, consumers will remain extremely cautious, many businesses will still be cash-constrained, and new areas of economic weakness will open up in state government, healthcare, education, financial services, housing, and professional services — all sectors that did OK in Q1.
The bottom line from a forecast perspective: Scenario B, a three- or four-quarter recession in the US, looks more probable than Scenario A, a two-quarter recession that ends in the later summer or early fall.