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Fed chair warns of ‘heartbreaking’ scenario as U.S. economy suffers worst first quarter since Great Recession

While the economy contracted at a 4.8% rate in the quarter, the second quarter is likely to show a decline of 30% — or more

A Neiman Marcus location in Washington last week. (Matt McClain/The Washington Post)

The U.S. economy suffered its sharpest decline since the Great Recession — a 4.8 percent drop — from January through March, and the head of the Federal Reserve warned the second quarter would be even uglier as many Americans continued to stay home to stem the spread of the coronavirus.

“We are going to see economic data for the second quarter that’s worse than any data we’ve seen for the economy,” Fed Chair Jerome H. Powell said in a video news conference. He called it “heartbreaking” to witness millions of job losses, especially in minority communities.

There is widespread agreement that the U.S. economy is in the midst of its worst crisis since the Great Depression, and Commerce Department data released Wednesday revealed just how severe it is becoming. Consumer and business spending nosedived in the first quarter, even with the economy shuttered for only half of March. Household spending tumbled 7.6 percent, and business investment sank 8.6 percent.

Although Americans flooded grocery stores to buy food and supplies, it was not nearly enough to offset lost spending on dining out, car sales, entertainment and other purchases.

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Powell vowed repeatedly Wednesday to use all of the Fed’s tools to keep U.S. businesses and households afloat during the crisis, but he warned that a recovery could take a while and that there is a significant risk of long-term damage if Congress and the central bank do not do enough to aid the economy.

“It may well be the case that the economy will need more support from all of us if the recovery is to be a robust one,” Powell said, adding, “It is important that we do everything we can to avoid that longer-run damage.”

Markets largely ignored the dour first-quarter economic data Wednesday, rallying on small but significant scientific advances against covid-19. The Dow Jones industrial average closed up 532.31 points, or 2.2 percent. Markets are up nearly 14 percent in April and on track to post the best month since October 1974.

The Federal Reserve has pumped $2.3 trillion into the U.S. economy. It’s just getting started.

More than 26 million Americans have already lost their jobs and had to seek unemployment aid, and those numbers are expected to rise Thursday with a new round of jobless claims. Many businesses are on the verge of going bankrupt, since they do not have enough money to sustain weeks without any customers or revenue.

It took three years to really begin to climb out of the Great Recession and more than a decade to recover from the Great Depression of the 1930s. Analysts say the government was too slow to act and too stingy with aid in the past, mistakes that should not be repeated now.

This is a “Depression-like shock,” said Joseph Brusuelas, chief economist at audit firm RSM. “Policymakers should be prepared to support other rounds of aid and stimulus for an economy that is going to be reeling for some time.”

Powell echoed that sentiment in his Wednesday news conference. “This is the time to use the great fiscal power of the United States,” Powell said, adding that “this is not the time” to be concerned about the national debt.

Analysts say the second quarter is likely to show a decline of more than 30 percent — a level not seen since the Great Depression — as much of the economy shut down to try to encourage people to stay home to stop the spread of the virus.

“There’s really no question about it. We are in a recession, and it’s going to be a sharp recession,” said economist Alicia Modestino, associate director of the Dukakis Center for Urban and Regional Policy.

An official recession occurs when the economy experiences two consecutive quarters of negative growth. A depression is a sustained period of contraction and job loss that lasts for several years. President Trump and many on Wall Street hope the government’s historic levels of aid can avert a depression.

On Wednesday, Trump predicted a quick recovery while talking with business leaders from companies including Toyota, Wynn Resorts and Waffle House about reopening the economy.

“I really think next year is going to be a tremendous year, and I think the fourth quarter is going to be fantastic,” Trump said. “I can feel it. I can feel the demand.”

Mass layoffs begin in cities and states amid coronavirus fallout

Yet economists across the political spectrum are more skeptical and are urging the federal government to give more money to states, cities and counties to avert mass layoffs and keep critical services going. They also foresee a need for more testing and more help for people out of work.

“We know Main Street recovers less quickly than Wall Street,” Modestino said. “It will take years to get back to where we were before with such low unemployment.”

So far, the Fed has pumped $2.3 trillion into the economy in the past six weeks, and analysts expect the Fed to bump that up to at least $5 trillion in aid by the end of the year. The amount is unprecedented and dwarfs the relief that Congress and the White House have provided.

The Fed’s swift interventions are widely credited with prompting a stock market rally in April and returning many parts of the bond market to normal after they froze up in March.

“Powell’s mantra is do whatever it takes for as long as it takes,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics. “There was a late reaction from Congress and the administration to the unfolding crisis. Powell sized up very quickly that the Fed needed to provide support.”

The Fed is expected to keep interest rates at zero for years, making it cheap to borrow money to buy a home or car or to start a company.

“We’re going to not be in any hurry to withdraw these measures or to lift off,” Powell said Wednesday. “We’re going to wait until we’re quite confident that the economy is well on the road to recovery.”

While the U.S. economy started off the year on solid footing, the situation deteriorated rapidly in March with the spread of the coronavirus, as Trump declared a national emergency and said gatherings should be limited to no more than 10 people. National and state-level decisions aimed at protecting the people’s health prompted millions of restaurants, gyms, stores, coffee shops and other businesses to shutter.

Annie Clark has owned Get Noticed Boutique in Richardson, Tex., for 15 years and has never seen anything like this. Most of her sales are done in the store. Shutting that down was a huge blow.

“I’ve been through a lot of ups and downs, but this is definitely uncharted territory,” Clark said. “What do you do? You sit on inventory and sit on big bills. … I can only just pray and hope the community I live in is going to support me when we reopen.”

Clark has had to borrow money on credit cards and from family to stay afloat, since getting a loan from a bank or the Small Business Administration has been difficult. But like many small-business owners, she will be able to survive only for so long.

“I hope I don’t have to close,” she said. “I’ve gotten little sleep with the unknown.”

One of the biggest concerns for business owners is whether customers will come back quickly once governors and mayors say it is all right to reopen or whether shoppers will be fearful to venture out. Early evidence from China and states such as Georgia that are trying to reopen is that caution abounds and spending remains way down.

“If consumers and workers remain housebound into the third quarter, or if the pandemic fades and then reemerges, the recession could last throughout 2020,” said Gus Faucher, chief economist at the PNC Financial Services Group. “The longer consumers are stuck at home and workers can’t get to their jobs, the greater the structural damage to the U.S. economy.”

To support the economy, the Fed has mainly purchased U.S. government bonds and mortgage-backed securities, much as it did during the 2008-2009 financial crisis. But given that the pandemic has caused most of the economy to shut down for an extended period of time, there has been a massive rush to borrow money as businesses and households struggle.

Given what’s happening, the Fed has pledged to buy corporate, state and local debt and make loans to midsize companies.

Many on Wall Street and in the business community are eager to know when the Fed will begin its Main Street Lending Program that is supposed to make loans to companies with about 500 to 10,000 employees. Powell said that the corporate debt program would start “fairly soon” but that the Main Street program would take longer to get going.

Nobel Prize-winning economist Paul Romer is urging the U.S. government to spend $100 billion to test nearly everyone in the nation to put people at ease that the virus is under control and that it is truly safe to reemerge. But so far, only about 2 percent of the nation has been tested.

“It’s totally in our control to fix this,” Romer said. “We should be spending $100 billion on the testing. We should just get it going. It’s just not that hard.”