US GDP Growth Slows to 4%

Economic growth slowed to an annualized 4.0 percent in the fourth quarter of 2020 from record-setting 33.4 percent growth in the third quarter. It was clear heading into the report that the economy could not sustain the historic pace set in the third quarter, but it fell short of the 4.2 percent consensus estimate.

Growth of the US economy slowed to 4 percent in the final quarter of 2020 after historically strong growth in the third quarter

Most of the overall slowdown was due to a dramatic deceleration in personal consumption as a spike in COVID-19 cases led governments to reinstitute restrictions across the country. Personal consumption growth slowed from 41.0 percent growth to just 2.5 percent. Spending on services slowed to 4 percent, while spending on goods declined 0.4 percent. Unsurprisingly, spending on food services and accommodations was particularly weak, declining 13.5 percent from the prior quarter.

Elsewhere, growth was much stronger. Nonresidential fixed investment increased 13.8 percent as equipment spending remained particularly robust and spending on structures increased for the first time since the third quarter of 2019. Residential fixed investment was also strong. Tight supply in the existing home market continues to increase activity in new home construction. Unfortunately, residential investment accounts for roughly 3.5 percent of the US economy, and the 33.5 percent annualized increase in category translated into just a 130 basis point contribution to overall growth.

Fixed investment made the largest contribution to overall growth and businesses continue to invest in equipment and new home construction remains robust.

Government spending declined for the second consecutive quarter as state and local governments continue to cut spending during the pandemic. Net international trade made a negative contribution to overall growth as exports grew slower than imports. Finally, the volatile private inventories category was positive for the second consecutive quarter.

For the full year, the size of the economy shrank 2.5 percent. This was the first calendar year decline in economic output since 2008. We expect the economic recovery to continue into 2021, with robust growth in the second half of the year as vaccinations allow consumers to resume pre-pandemic spending.

The second of three estimates of fourth quarter 2020 GDP is expected on February 25th.