US economy shrinks 4.8 percent in first quarter

The U.S. Commerce Department announced Wednesday that the nation's GDP plummeted 4.8% in the first quarter. The Federal Reserve Chairman Jerome Powell warned the second quarter numbers are expected to be worse.

"An extraordinary, extraordinary shock. Unlike anything that's happened in my lifetime," said Powell, following a meeting of the Federal Reserve Bank Board, "Next week's jobs report is expected to show the unemployment rate which was at 50-year lows just two months ago has surged to double digits."

Jesse Rothstein, a U.C. Berkeley Professor of Economics and Public Policy and former chief economist at the U.S. Department of Labor says this recession is hitting a different sector of the economy.

"It's been service workers, which is unusual. We've never seen a service-led recession before," said Rothstein

He says the U.S. will need a strong rebound in consumer demand in order to recover.

"The two things we need are to keep families afloat right now, and then to make sure that when we do release the restrictions that people have money to spend," said Rothstein.

Despite more than $2 trillion in relief bills passed by Congress, some of that money is not yet reaching people's pockets.

For Walnut Creek photographer Jim Fidelibus, the view through his lens in his empty studio is grim.

"This is a really scary time. I have a little saved bit of money saved aside for a rainy day but this is a torrential downpour economically speaking," said Fidelibus.

He says May and June are usually his busiest times, equivalent to the Christmas rush for retailers. Now, though, he says graduation photos, Father's Day portraits, and the start of wedding season shoots have all dried up.

"I'm probably losing probably $60,000-70,000 just in business in the next 8 weeks here that are just gone," said Fidelibus, "We're worried. My wife and I are looking at our finances. We tried applying for the government loans but we have not heard back from that." 

Professor Rothstein says another big danger right now is the potential collapse of state and local governments' budgets, that could push unemployment numbers even higher. 

"State and local governments can't run deficits and so if their tax revenue collapses, they're going to have to lay off thousands of teachers and other workers and those people will have to cut back on their spending. So I think the single-most important thing we could do right now, is the federal government to provide aid to local governments so they don't have to do that retraction," said Rothstein.

Rothstein says even if federal aid increases the nation's projected $3.8 trillion deficit, interest rates are near zero, and it could help prevent the recession from getting even worse.

He also notes that California's early shelter-in-place orders might help its economy recover more quickly in the long run, than it might have had the initial outbreak been worse.

"I think in the initial statistics it may look worse because we did a better job of shutting down quickly than some other places and that may show up early. Over time I think that will pay off through hopefully reduced infections and that will allow us to open up sooner," said Rothstein.

The aid to states and local governments has been a key battle in Congress. 

On Wednesday, Senate Majority Leader Mitch McConnell reversed course and said now, state and local aid will be considered as the House and Senate negotiate the next relief bill.