The numbers: The U.S. economy grew at a mediocre pace of 4% a year in the last three months of 2020, as a record wave of coronavirus cases has stunted the recovery, extending the timeline for a broader recovery by the end of this year.
The pandemic was a crushing blow to the economy last year. Gross domestic product, the official score for the United States economy, shrank 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 linked to the summer reopening of the economy, after companies closed to combat the pandemic in the spring. However, the biggest increase so far in coronavirus cases in early winter has made the slowdown more pronounced.
Governments imposed some restrictions on companies and customers stayed away 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 ways, the economy has remained better than expected, as individuals and businesses have adapted to the crisis better than at the beginning of the year. Consumer spending and business investment have increased and the housing market boom has not slowed.
The economy still has a lot to do, however, and a full recovery cannot take place until vaccines become more widespread and the coronavirus pandemic is extinguished.
“There is nothing more important to the economy now than people being vaccinated,” Federal Reserve President Jerome Powell told a news conference.
Read: Durable goods orders and business investment rise for the eighth consecutive month
What happened: Consumer spending, by far the largest part of the economy, increased by a modest 2.5% per year in the last three months of the year.
Spending increased by a record 41% in the third quarter, driven by government stimulus payments and an end to the US blockade.
More layoffs and the temporary end of federal aid for unemployed workers held back spending towards the end of the year.
Business investment was much stronger than expected, however. Equipment spending increased by almost 25% and, surprisingly, spending on structures such as office buildings increased by 3% in the fourth quarter.
Companies also continued to rebuild inventories after allowing them to decrease during the worst of the pandemic. The change in the value of stored products increased by US $ 48.3 billion in the fourth quarter.
The housing had another strong performance. Investment in new homes jumped 33.5% as construction companies sought to meet growing demand.
Lower mortgage interest rates in modern times have attracted swarms of buyers, although higher house prices may work as a deterrent this year if they continue to rise.
Government spending fell 1.2%, mainly because of declines at the state and local levels. Many local governments have cut spending in response to a decline in tax revenue.
International trade was a drag, as it usually is. Exports increased by 22%, but imports increased at a faster rate of 30%. A larger trade deficit subtracts from GDP.
The inflation rate increased to 1.5% annualized in the fourth quarter. Inflation is low in almost all measures, however, and poses little risk to the economy.
Watch: MarketWatch Coronavirus Recovery Tracker
The big picture: The American economy absorbed another major blow from the coronavirus at the end of last year, but proved more resilient.
Governments issued fewer restrictions and restrictions on business, and most companies were better able to adapt and improvise. The strong increase in business investment, moreover, bodes well.
The resilience of the economy should provide a good starting point for a faster recovery later in the year, as vaccines spread, the pandemic evaporates and Washington approves more federal relief. President Biden is promising trillions of dollars in extra aid.
However, a broader recovery may not happen until spring or summer. GDP is expected to register even weaker growth in the first quarter.
What are they saying? “The bottom line is that the economy remains in a delicate position,” said Jim Baird, investment office 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 accelerates and we get closer to collective immunity.”
Market reaction: The DJIA of the Dow Jones Industrial Average,
and S&P 500 SPX,
increased in Thursday’s negotiations.