The numbers: The US economy grew at a moderate annual rate of 4% in the last three months of 2020 as a record wave of coronavirus cases hampered the recovery and pushed the timetable for a broader recovery into later this year.
The pandemic dealt a devastating blow to the economy last year. Gross domestic product, the official scorecard for the US economy, contracted by 3.5%, marking the largest contraction since 1946.
GDP was expected to decline in the last three months of 2020 after record 33% annual growth in the third quarter, coupled with the reopening of the economy in the summer after businesses shut down to combat the pandemic in the spring . Still, the largest increase so far in early winter coronavirus cases made the slowdown more pronounced.
Governments again imposed certain restrictions on businesses and customers stayed away in the fourth quarter, leading to more layoffs and the first drop in employment since the start of the pandemic last spring. The worst damage occurred in December.
Yet in many respects, the economy has held up better than expected as individuals and companies have adapted to the crisis better than earlier this year. Consumer spending and business investment both increased and the housing boom did not slow down.
However, the economy still has a lot to catch up, and a full recovery cannot take place until the vaccines are spread more widely and the coronavirus pandemic disappears.
“There is nothing more important to the economy right now than getting people vaccinated,” Jerome Powell, chairman of the Federal Reserve, said at a news conference on Wednesday.
Read: Durable goods and business investment orders are up for the eighth straight month
What happened: Consumer spending, by far the largest part of the economy, grew by a modest 2.5% year on year in the last three months of the year.
Spending was down a record 41% in the third quarter, fueled by government stimulus payments and the end of a US lockdown.
More layoffs and the temporary expiration of federal aid for unemployed workers kept spending low by the end of the year.
However, business investment was much stronger than expected. Expenditure on equipment was up almost 25% and surprisingly, expenditure on structures such as office buildings increased by 3% in the fourth quarter.
Companies also continued to rebuild stocks after allowing them to be withdrawn during the worst pandemic. The change in the value of the stored goods increased by $ 48.3 billion in the fourth quarter.
Housing was another strong achievement. Investments in new homes were up 33.5% as builders tried to meet rising demand.
The lowest mortgage interest rates in modern times have attracted crowds of buyers, although higher home prices this year could be a deterrent if they continue to rise.
Government spending fell by 1.2%, largely as a result of declines at the national and local level. Many local governments have cut spending in response to a decline in tax revenues.
International trade was a drag as it often is. Exports were up 22%, but imports were up at a faster decline of 30%. A larger trade deficit subtracts from GDP.
Inflation rose by 1.5% year on year in the fourth quarter. However, inflation is almost always low and poses little risk to the economy.
See: MarketWatch Coronavirus Recovery Tracker
The big picture: The American economy was hit hard again by the corona virus at the end of last year, but it turned out to be more hardy.
Governments imposed fewer and tighter restrictions on business and most companies were better able to adapt and improvise. In addition, the sharp increase in business investment bodes well.
The economy’s resilience should be a good starting point for a faster recovery later in the year as vaccines become more widespread, the pandemic evaporates, and Washington approves more federal aid. President Biden pledges trillions of dollars in additional aid.
Still, broader recovery cannot take place until spring or summer. GDP is expected to show even weaker growth in the first quarter.
What do they say? “The bottom line is that the economy is in a vulnerable spot,” said Jim Baird, principal investment firm at Plante Moran Financial Advisors. “The good news is that the light is approaching the end of the tunnel as the spread of vaccines accelerates and we get closer to the immunity of the herd.”
Market reaction: The Dow Jones Industrial Average DJIA,
and S&P 500 SPX,
rose in Thursday transactions.