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Numbers: The US economy grew at a lackluster annual rate of 4% in the last three months of 2020, as a record spate of coronavirus cases delayed the recovery, pushing back the schedule for a wider rebound until later this year.
The pandemic took a heavy toll on the economy last year. Gross domestic product, the official dashboard of the US economy, fell 3.5% to mark the sharpest contraction since 1946.
GDP is expected to decline in the last three months of 2020 after a record annualized gain of 33% plus in the third quarter linked to the economy reopening this summer after businesses were blocked to fight the pandemic in the spring. Yet the largest increase to date in coronavirus cases at the start of winter has made the slowdown more pronounced.
Governments reimposed some restrictions on businesses and customers stayed on the sidelines in the fourth quarter, leading to more layoffs and the first drop in jobs since the pandemic began last spring. The worst damage occurred in December.
Yet in many ways the economy has held up better than expected as individuals and businesses have adjusted better to the crisis than at the start of the year. Consumer spending and business investment have increased and the boom in the real estate market has not abated.
However, the economy still has a lot of ground to catch up and a full recovery cannot take place until vaccines become mainstream and the coronavirus pandemic subsides.
“There is nothing more important to the economy right now than people getting vaccinated,” Federal Reserve Chairman Jerome Powell said at a press conference on Wednesday.
Lily: Durable goods orders and business investment increase for eighth consecutive month
What happened: Consumer spending, by far the largest part of the economy, grew at a modest annual rate of 2.5% in the last three months of the year.
Spending jumped a record 41% in the third quarter, fueled by government stimulus payments and the end of the US lockdown.
Further layoffs and the temporary expiration of federal unemployment assistance dampened spending toward the end of the year.
Business investment, however, was much larger than expected. Equipment spending jumped nearly 25% and, surprisingly, spending on structures such as office buildings rose 3% in the fourth quarter.
Businesses have also continued to replenish their inventories after allowing them to decline during the worst of the pandemic. The change in the value of inventory assets increased by $ 48.3 billion in the fourth quarter.
Housing was another good result. Investment in new homes jumped 33.5% as builders sought to meet growing demand.
The lowest mortgage interest rates in modern times have attracted swarms of buyers, although rising home prices could act as a deterrent this year if they continue to rise.
Public spending fell 1.2%, largely due to declines at state and local level. Many local governments have cut spending in response to declining tax revenues.
International trade was a drag, as it often is. Exports grew 22%, but imports grew at a faster pace of 30%. A larger trade deficit subtracts from the GDP.
The inflation rate increased to 1.5% annualized 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 US economy absorbed another major blow from the coronavirus late last year, but it has proven to be more robust.
Governments imposed fewer and fewer restrictions on businesses, and most businesses were better able to adapt and improvise. The sharp increase in business investment is further auspicious.
The resilience of the economy should provide a good starting point for a faster recovery later in the year as vaccines become widespread, the pandemic evaporates and Washington approves more federal relief. President Biden pledges billions of dollars in additional aid.
Still, a broader recovery might not happen until spring or summer. GDP is expected to show even lower growth in the first quarter.
What do they say? “The bottom line is that the economy remains in a tight spot,” said Jim Baird, head of the investment office at Plante Moran Financial Advisors. “The good news is that the light at the end of the tunnel is approaching, as vaccine delivery accelerates and we move closer to herd immunity.”
Market reaction: The Dow Jones Industrial Average DJIA,
and S&P 500 SPX,
rose in Thursday trades.
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