The numbers: The U.S. economy grew at an annual rate of 4% in the last three months of 2020, as a record wave of coronavirus cases slowed the recovery, eliminating the timing of a broader rebound until the end of ‘this year.
The pandemic hit the economy hard last year. Gross domestic product, the official scorecard of the US economy, fell 3.5% to mark the largest contraction since 1946.
GDP was expected to decline in the last three months of 2020 after a record annual gain of 33% more in the third quarter, linked to the reopening of the economy in the summer after the business blockades to combat the pandemic in the spring. However, the larger increase so far in coronavirus cases in early winter made the slowdown more pronounced.
Governments imposed some restrictions on businesses and customers stayed out of the fourth quarter, leading to more layoffs and the first drop in employment since the pandemic began last spring. The worst of the damage occurred in December.
However, in many respects, the economy has held up better than expected, as individuals and businesses adapted better to the crisis than before the year. Consumer spending and business investment increased and the real estate market boom showed no disappointment.
However, the economy still has a lot of ground to resolve and cannot fully recover until vaccines are spread and the coronavirus pandemic is over.
“There is 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 increase for an eighth consecutive month
What happened: Consumer spending, by far most of the economy, rose by a modest annual rate of 2.5% in the last three months of the year.
Spending had hit a record 41% in the third quarter, driven by government stimulus payments and the end of a U.S. close.
More layoffs and the temporary expiration of federal aid for unemployed workers slowed spending near the end of the year.
However, business investment was much stronger than expected. Equipment spending rose nearly 25% and, surprisingly, spending on structures such as office buildings rose 3% in the fourth quarter.
Companies also continued to rebuild inventories after letting them shrink during the worst moment of the pandemic. The change in the value of stored goods increased by $ 48.3 billion in the fourth quarter.
Housing was another of the big players. Investment in new homes jumped 33.5% as builders tried to meet growing demand.
Lower mortgage interest rates in modern times have dragged buyers ’swarms, although higher home prices may be a deterrent this year if they continue to rise.
Government spending fell 1.2%, mainly due to falls at the state and local level. Many local governments have reduced spending in response to declining tax revenues.
International trade was a drag as usual. Exports increased by 22%, but imports increased by 30% faster. A larger trade deficit rests on GDP.
The inflation rate rose to 1.5% year-on-year in the fourth quarter. However, inflation is virtually low and poses little risk to the economy.
See: MarketWatch Coronavirus Recovery Tracker
The big picture: The U.S. economy absorbed another major blow from the coronavirus late last year, but it turned out to be more resilient.
Governments issued increasingly tight restrictions on companies and most companies were able to better adapt and improvise. The sharp rise in business investment, moreover, bodes well.
The resilience of the economy should provide a good starting point for a faster recovery by the end of the year as vaccines become widespread, the pandemic evaporates, and Washington approves more federal relief. President Biden promises billions of dollars in extra aid.
However, a broader recovery may not occur until spring or summer. GDP is expected to grow even weaker in the first quarter.
What do they say? “The bottom line is that the economy remains in a delicate place,” said Jim Baird, head of investment at Plante Moran Financial Advisors. “The good news is that the light at the end of the tunnel is approaching, as the distribution of the vaccine is accelerating and we are approaching the immunity of the herd.”
Market reaction: The Dow Jones Industrial Average DJIA,
and S&P 500 SPX,
increased in trades on Thursdays.