GDP shows growth in U.S. economy slowed to a 4% annual pace at end of 2020

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The numbers: The U.S. grew at a lackluster 4% annual pace in the final three months of 2020 as a record wave of coronavirus cases stunted the recovery, pushing out the timetable for a broader economic rebound until later this year.

The pandemic dealt a crushing blow to the economy last year. Gross domestic product, the official scorecard for the U.S. economy, shrank by 3.5% to mark the biggest contraction since 1946.

GDP was expected to ebb in the final three months of 2020 after a record 33%-plus gain in the third quarter tied to the reopening of the economy. Yet the biggest increase in coronavirus cases so far made the slowdown even more pronounced.

Governments reimposed some restrictions on businesses and customers stayed away, leading to more layoffs and the first decline in employment since the onset of the pandemic last spring. The worst of the damage took place in December.

Yet in many ways the economy has held up better than expected as individuals and companies adapted to the crisis better than they did earlier in the year. Consumer spending and business investment both rose and a housing market boom showed no letup.

The economy still has lots of ground to make up, however, and a full recovery can’t take place until the vaccines become more widespread and the coronavirus peters out.

“There’s nothing more important to the economy right now than people getting vaccinated,” Federal Reserve Chairman Jerome Powell said Wednesday at a news conference.

Read: Durable-goods orders and business investment climb for eighth month in a row

What happened: Consumer spending, by far the biggest part of the economy, rose at a modest 2.5% annual clip in the final three months of the year.

Spending had popped by a record 41% in the third quarter, fueled by government stimulus payments and the end of a U.S. lockdown.

More layoffs and the temporary expiration of federal aid for unemployed workers held down spending near year end.

Business investment was much stronger than expected, however. Spending on equipment jumped almost 25%, and in a surprise, outlays on structures such as office buildings advanced 3% in the fourth quarter.

Companies also continued to rebuild inventories after letting them draw down during the worst of the pandemic. The change in the value of stockpiled goods rose by $48.3 billion in the fourth quarter.

Housing was another strong performer. Investment in new houses leaped 33.5% as builders sought to meet rising demand.

The lowest mortgage rates in modern times have drawn in swarms of buyers, though higher home prices might act as a deterrent this year if they keep rising.

Government spending fell 1.2%, largely because of declines at the state and local level. Many governments have cut spending in response to a decline in tax revenue.

Trade was a drag as it often is. Exports rose 22%, but imports increased at at a faster 30% clip. A bigger trade deficit subtracts from GDP.

The rate of inflation increased at annualized 1.5% in the fourth quarter. Inflation is low by virtually ever measure, however, and poses little risk to the economy.

See: MarketWatch Coronavirus Recovery Tracker

The big picture: The economy absorbed another major blow from the coronavirus at the end of last year, but it proved more hardy.

Governments issued fewer and more narrow restrictions on business and most companies were better able to adapt and improvise. The strong increase in business investment, what’s more, is a good omen.

The resilience of the economy should provide a good launching point for a faster recovery later in the year if the vaccines prove effective, the pandemic evaporates and Washington approves more federal relief. President Biden is promising trillions in extra aid.

Yet a broader recovery might not happen until the spring or summer. GDP is expected to post even weaker growth in the first quarter.

What they are saying? “The bottom line is that the economy remains in a delicate spot,” said Jim Baird, chief investment office at Plante Moran Financial Advisors. “The good news is that the light at the end of the tunnel is approaching, as vaccine distribution accelerates and we move closer to herd immunity.”

Market reaction: The Dow Jones Industrial Average
DJIA,
+1.18%

and S&P 500
SPX,
+1.02%

rose in Thursday trades.



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