American economy under Orangutan...

Last year's American economy shrank the most since 1946

By Anneken Tappe

The US economy grew at an annualized and seasonally adjusted rate of 4% in the fourth quarter of 2020, just as economists had predicted, the Commerce Department reported Thursday. But that didn't make up for a bad first quarter and an historically awful second quarter.

For 2020 as a whole, GDP decreased by 3.5% from the prior year. That was the worst decline since 1946.

It was the first time US GDP declined since 2009, when it fell 2.5% during the financial crisis.

If it wasn't for the current crisis, a 4% quarterly growth rate would be a great number. But the nation is still far from its pre-pandemic economic glory and this pace of growth just won't cut it.

Put differently, US GDP stood at 20.9 trillion at the end of 2020, compared with 21.4 trillion the year before.

Last year brought on the worst economic shock in history and US GDP, the broadest measure of economic activity, yo-yoed in response.

GDP shrank a record 31.4% on an annualized basis between April and June following the initial pandemic lockdowns. In the following three months, it came screaming back at a record 33.4% annualized pace but that still wasn't nearly enough to make up for the damage already done.

What's next?

For 2021 and the Biden administration Thursday's report is a call to action and a reminder that the economic crisis the pandemic caused is far from over.

Federal Reserve Chairman Jerome Powell reiterated Wednesday that the recovery of the US economy is dependent on the path of the virus. Across the country, communities remain under varying lockdown protocols to help curb the spread of the disease, which weighs on economic activity. Plus, millions of people remain unemployed as a result of the pandemic, which ravaged industries based on social contact, such as hospitality.

Consumer spending grew at an annual rate of just 2.5%, compared with a 41% annual rate in the prior quarter, reflecting renewed lockdowns and rising infection rates in the last three months of the year. Despite the slowdown, the increase in spending helped GDP grow in the fourth quarter.

An increase in business investments and housing also added to the growth.

But there was still plenty to be concerned about: disposable incomes fell by 9.5% on an annualized basis in the fourth quarter of last year, while the personal savings rate remained elevated at 13.4%. For an economy driven by consumer spending, it's not a good sign if people are leaving their money in the bank. Overall, personal income also declined, mostly due to the decrease in benefits as the CARES Act relief programs were winding down. With more stimulus agreed to since then and yet more eyed by the Biden administration, this might reverse in the future.

Conditions might not change very much in the first quarter of 2021, economists said. But things should get better as the vaccine rollout continues and warmer weather in the spring allows consumers more freedom to venture out, said PNC chief economist Gus Faucher.

"With effective vaccines offering the possibility of a return to normalcy later this year and the Biden administration intent on more fiscal stimulus, we think GDP growth will be as high as 6.5% this year," said Paul Ashworth, chief US economist at Capital Economics, in a note.