Economy Shrank by 3.5% in 2020, but Rebounded in Final Months

The economic devastation caused by the coronavirus crisis ended the longest growth streak on record, which lasted nearly 11 years.  

A for-rent sign hangs in a store closed due to the coronavirus pandemic in Miami Beach, Fla., last July. (AP Photo/Lynne Sladky)

(CN) — The U.S. economy shrank last year by the largest amount since World War II, but a turnaround in the fourth quarter leaves some hope for a strong recovery in 2021.

The 3.5% overall decline in gross domestic product in 2020 was the worst in 74 years after the economy was ravaged by the coronavirus pandemic. But the 4% annual rate GDP growth in the final three months was better than most experts expected.

Paul Ashworth, chief U.S. economist at Capital Economics, said there is reason for optimism in the new year.

“With coronavirus cases now falling and Congress agreeing on a new $900 billion stimulus late last year, we expect consumption growth to accelerate again in the first half of this year,” he wrote. “First-quarter GDP growth should be 5% and second-quarter growth could be nearer 10%, particularly if Congress agrees on more stimulus.”

The Commerce Department report released Thursday shows the GDP, a primary indicator of economic health that measures output of goods and services, leveled out somewhat in the fourth quarter after a record 33.4% plunge in the second quarter and an equally large surge in the third quarter.

“After expanding by a record rate in the third quarter, it was clearly not a surprise when fourth quarter growth came in way lower. But it is hard to argue that the pace was anything but strong,” said Joel Naroff of Naroff Economics.

Over 20 million jobs were lost last April when the Covid-19 crisis first swept the nation, keeping consumers at home and forcing businesses to close, particularly in the leisure and hospitality industry. The labor market is still down nearly 10 million jobs compared to pre-pandemic levels.

The economic devastation wrought by the virus ended the longest growth streak on record, which lasted nearly 11 years.  

The yearly 3.5% drop in GDP in 2020 was the first decline since 2009, when it fell 2.5% during the Great Recession. It marks the worst plunge since 1946, when the economy shrank 11.6% in the aftermath of World War II.

According to the report, consumer spending, which drives about 70% of economic activity, only grew by a 2.5% annual rate in the fourth quarter of last year. That’s down dramatically from a 41% increase in the third quarter, before a winter wave of virus cases stalled recovery efforts again. Fourth quarter growth was driven mostly by business investment and housing, which grew at annual rates of 13.8% and 33.5%, respectively.

President Joe Biden is pushing for a $1.9 trillion coronavirus relief package, following up on the $900 billion stimulus bill passed by Congress in the final days of the Trump administration.

The new president’s proposal includes $1,400 checks for most Americans plus money for vaccination programs and the effort to reopen schools. Biden is also calling for a more targeted stimulus package to help small businesses hurt by the shutdown policies, saying the CARES Act passed last March was susceptible to fraud and waste. 

“It will focus on small businesses on Main Street,” he said when unveiling the plan two weeks ago. 

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