The numbers: The US economy grew at a weak annual rate of 4% in the last three months of 2020, as a record wave of coronavirus cases hindered recovery, pushing the timetable for a broader recovery by the end of this year.
The pandemic hit the economy hard last year. Gross domestic product, the official scoreboard for the US economy, fell 3.5% to mark the biggest contraction since 1946.
GDP was expected to decline in the last three months of 2020, after a record 33% annualized gain in the third quarter related to the reopening of the economy in the summer, after business closures to combat the pandemic in the spring. However, the largest increase in coronavirus cases to date in early winter has made the slowdown more pronounced.
Governments imposed certain restrictions on businesses, and customers fell far short in the fourth quarter, leading to more layoffs and the first decline in employment since the pandemic began last spring. The worst damage occurred in December.
However, in many respects the economy has performed better than expected, as individuals and companies have adapted better to the crisis than they did at the beginning of the year. Consumer spending and business investment have risen, and the real estate market boom has not declined.
However, the economy still has a lot of land and a full recovery cannot take place until vaccines are more widespread and the coronavirus pandemic is gone.
“There is nothing more important to the economy right now than people getting vaccinated,” Federal Reserve Chairman Jerome Powell told a news conference Wednesday.
Read: Durable goods orders and commercial investment increase for eighth consecutive month
What happened: Consumer spending, by far most of the economy, has risen to a modest 2.5% annually in the last three months of the year.
Spending rose by a record 41% in the third quarter, fueled by government stimulus payments and the end of the US blockade.
Several layoffs and the temporary expiration of federal aid for unemployed workers have held back spending near the end of the year.
However, investment in business was much stronger than expected. Equipment spending rose by almost 25% and, surprisingly, spending on structures such as office buildings rose by 3% in the fourth quarter.
Companies also continued to rebuild stocks after letting them through during the worst pandemic. The change in the value of stored goods increased by $ 48.3 billion in the fourth quarter.
Housing was another powerful performer. Investments in new homes increased by 33.5%, as builders sought to meet growing demand.
The lowest mortgage interest rates in modern times have attracted swarms of buyers, although higher house prices could act as a deterrent this year if they continue to rise.
Government spending fell by 1.2%, largely due to local and state declines. Many local governments have cut spending in response to declining tax revenues.
International trade has been an obstacle, as it often is. Exports increased by 22%, but imports grew by 30% faster. A larger trade deficit decreases GDP.
The inflation rate rose to 1.5% annually in the fourth quarter. However, inflation is virtually low, and poses a low risk to the economy.
See: MarketWatch Coronavirus Recovery Tracker
The whole picture: The US economy absorbed another major blow from the coronavirus late last year, but it turned out to be tougher.
Governments issued fewer tighter business restrictions, and most companies were better able to adapt and improvise. Moreover, the strong growth of business investment is auspicious.
The resilience of the economy should provide a good starting point for a faster recovery during the year, as vaccines become more widespread, the pandemic evaporates, and Washington approves more federal relief. President Biden promises billions of dollars in additional aid.
However, a broader recovery may not happen until spring or summer. GDP is expected to grow even weaker in the first quarter.
What are they saying? “The bottom line is that the economy remains in a delicate place,” said Jim Baird, chief investment officer at Plants Moran Financial Advisors. “The good news is that the light at the end of the tunnel is approaching as the distribution of the vaccine accelerates and we are approaching the herd’s immunity.”
Market reaction: Dow Jones Industrial Average DJIA,
and S&P 500 SPX,
grew in trades on Thursday.