GDP contracted 3.5% in 2020, worst performance since 1946

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Despite a pandemic continuing to ravage restaurants, movie theaters, and other entertainment-related industries, the economy closed 2020 on a relatively positive note, only slightly missing economists’ expectations.

U.S. gross domestic product grew at a 4% annualized rate in the fourth quarter, the Bureau of Economic Analysis reported Thursday.

“The increase in fourth quarter GDP reflected both the continued economic recovery from the sharp declines earlier in the year and the ongoing impact of the COVID-19 pandemic, including new restrictions and closures that took effect in some areas of the United States,” the bureau wrote. The BEA cautioned, however, that “the full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the fourth quarter of 2020.”

Despite the fourth-quarter growth, the U.S. economy still contracted 3.5% for the full year — making 2020 the worst year for economic activity since the end of World War II, according to the Peterson Institute for International Economics. The economy fell into a recession in February during the onset of the coronavirus pandemic, whipsawing from a 31.4% plummet in the second quarter before rebounding a record-breaking 33.4% in the next quarter.

PIEE noted that the contraction in GDP “was likely less bad” in the U.S. than for other advanced economies.

“Among the other major advanced economies, only Japan, where the pandemic has been much less deadly and which largely avoided the most stringent halts to economic activity, is expected to have a smaller contraction than the United States,” the institute’s Jason Furman and Wilson Powell wrote.

The strongest growth sector for the fourth quarter was residential investments, which grew 33.5%, respectively. The coronavirus pandemic has been a boon to the housing market, which saw housing prices surge, fueled by rock-bottom mortgages and limited supply.

Despite a slight cooling in the housing market toward the end of 2020, analysts expect that builders “are going to be really busy” in 2021, according to Forbes, as new construction, particularly for entry-level homes, is expected to ramp up to meet sustained demand.

The economy has also been buoyed by several rounds of federal relief, most recently a $900 billion spending measure that was approved in December. The Biden administration is also working to pass another $1.9 trillion measure, which includes another round of checks to individuals.

Those checks, in addition to reduced consumption generally and slight income growth, also resulted in 2020 ending with many households increasing their savings. PIEE estimates that the savings rate heading into the new year was 16%, compared to the average of 7% in recent years.

Federal Reserve Chairman Jerome Powell cautioned that despite continued growth in the last quarter, the U.S. is still not healthy.

“We’re a long way from a full recovery,” Powell said at a Wednesday press conference. “Something like 9 million people remain unemployed as a consequence of the pandemic. That’s as many people as lost their jobs at the peak of the global financial crisis and the Great Recession.”

Powell said that widespread vaccination against COVID-19 remains the key to economic recovery and a return to normalcy, saying that “there’s nothing more important to the economy now than people getting vaccinated.”

The U.S. has distributed more than 47 million vaccines, 24.6 million of which have been administered, according to data from the Centers for Disease Control and Prevention. So far, roughly 20.7 million people have received at least one dose of the COVID-19 vaccine. The U.S. has already reached President Biden’s goal of administering 1 million vaccines every day, but many are now saying that his goal isn’t enough.

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