Tip Sheets

Drop-off in consumer spending to drive first quarter GDP losses

Media Contact

Rachel Rhodes

The U.S. Bureau of Economic Analysis will release a revised estimate of gross domestic product (GDP) for the first quarter of 2020 on Thursday, May 28. Previous estimates predicted a 3.5 percent decrease in current dollar GDP, in large part due to COVID-19 response measures taken in March.

Andrew Karolyi

Professor of Asset Management and Finance

Andrew Karolyi is a professor of finance and economics at the Cornell University SC Johnson College of Business and an expert on investments and international markets. He expects that revisions to the estimate given by the Bureau of Economic Analysis (BEA) will be driven by declines in consumer spending on goods and services.

Karolyi says:

“We know that much of the source data the BEA grabs for advanced estimates are incomplete and subject to revision, so all eyes go to the first revision coming up this week. One way to gauge whether we need to be braced for an even worse reported contraction is to look at the components of the GDP estimate last month that were most striking. The headline was clearly the 7%+ drop-off in personal consumption expenditures (PCE) on goods and services which represents nearly 70% of the $21.5 trillion. Health care services and motor vehicles and parts were the biggest contributors. BEA relies on reports from many agencies for these PCE components so I expect the preliminary numbers for them to be most exposed to a revision.

“Intriguingly, a disproportionately larger contraction in imports took place relative to exports, which together helped to soften the blow of the contraction in GDP advance estimates. That the U.S. dollar’s strength continues apace – no doubt fueled by global investors seeking U.S.-dollar denominated assets as a safe haven during this pandemic – begs the question as to whether export-oriented countries will double-down their efforts and cause our already $500 billion trade imbalance to widen further.”

Erica Groshen

Visiting Senior Scholar at the School of Industrial and Labor Relations

Erica Groshen is a senior extension faculty member at the Cornell University School of Industrial and Labor Relations. She is a former commissioner of the U.S. Bureau of Labor Statistics and vice president of the Federal Reserve Bank of New York, and has written extensively on how economies can recover from recessions

Groshen says: 

Much of the decline in activity is temporary. When the virus is fully under control, with help from government stimulus, we can expect much of the economic activity we had before the virus to return. 

“However, as happens during most recessions, some changes are permanent. For example, some companies will declare bankruptcy and close down because their owners will not be able to survive the financial hit. In addition, some business and consumption practices will change permanently. The strength of the rebound will depend partially on the balance between temporary and permanent changes to the economy. All else equal, the more permanent the changes, the more attenuated the recovery.”

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