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4Q GDP: Economy expands at a 4.0% annualized rate

The U.S. economy expanded in the final three months of 2020, albeit with slowing growth as the pandemic tore across the country at an alarming clip at the end of the year.

The Commerce Department’s first estimate on fourth-quarter gross domestic product (GDP) was released Thursday at 8:30 a.m. ET. Here were the main results in the report, compared to Bloomberg consensus data:

  • 4Q GDP, annualized Q/Q: 4.0% vs. 4.2% expected, 33.4% in 3Q

  • 4Q Personal consumption: 2.5% vs. 3.1% expected, 41.0% in 3Q

  • 4Q Core personal consumption expenditures: 1.4% vs. 1.2% expected, 3.4% in 3Q

Economic activity was expected to slow significantly from the third quarter’s 33.4% annualized increase, in large part due to a natural moderation after the record surge. The soaring third-quarter growth had followed a record drop of 31.4% in the second quarter, which reflected the impact of early pandemic lockdowns in spring 2020. Overall, GDP remained below pre-pandemic levels from the fourth quarter of 2019.

For the full year, U.S. GDP contracted at a 3.5% annualized rate. This marked the first contraction in economic activity since 2009, and the biggest drop since 1946.

“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 Commerce Department’s Bureau of Economic Analysis said in its report Thursday.

The biggest contributor to U.S. economic growth — the consumer — weakened notably especially in December. Retail sales dropped on a month-over-month basis in each of October, November and December largely as a result of declining services spending, though they remained higher year-over-year. Plus, non-farm payroll growth turned negative for the first time since April in December, suggesting a weakening job market may have chipped away at consumers’ spending power. And also on Thursday, the Labor Department’s latest report on weekly jobless claims showed another historically elevated 847,000 Americans filed for first-time unemployment benefits last week.

All told, personal consumption in the fourth quarter increased at an only 2.5% annualized rate, according to Thursday’s report, missing expectations and decelerating sharply from the record 41.0% rate from the September quarter.

Other, less heavily weighted components of the GDP were mixed, given the assorted batch of economic data leading up to Thursday’s report.

The housing market has been a notable standout, and residential fixed investment contributed 1.29 percentage points to the headline figure on GDP. Heading into the report, both housing starts and existing home sales surged to their highest levels since 2006 in December, driven by demand for new homes while socially distancing and extremely low mortgage rates. Non-residential investment also contributed positively to GDP, led by a jump in spending on equipment.

Meanwhile, trade dragged on GDP, with net exports subtracting 1.52 percentage points to the headline figure as a rebound in imports outpaced the slow recovery in exports. Consistent with the stronger recovery seen in the manufacturing sector relative to the services sector, goods exports far outpaced those of services.

As always, the GDP report provided an only backwards-looking snapshot of the U.S. economy, and belied some of the weakening trends in the labor market especially seen at the start of this year.

“Prospects for growth in the first quarter are uncertain and are dependent on the virus as well as vaccine disbursement,” Rubeela Farooqi, chief U.S. economist for High Frequency Economics, said in an email Thursday. “The economy will bounce back strongly once activity can resume. Until that time, risks remain skewed to the downside, especially in the service sector.”

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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