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GDP shows economy grew at 4% annual pace at the end of 2020

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The numbers: The U.S. grew at a modest 4% annual pace in the final three months of 2020 as a record wave of coronavirus cases stunted the recovery, pushing out the timetable for a broader economic rebound until later this year.

The increase in gross domestic product, the official scorecard for the U.S. economy, fell short of Wall Street expectations. Economists polled by the Dow Jones and The Wall Street Journal had forecast 4.3% growth.

GDP was expected to ebb after a record 33%-plus gain in the third quarter tied to the reopening of the economy, but the biggest increase in coronavirus cases so far made the slowdown even more pronounced toward the end of the year.

Governments reimposed some restrictions on businesses and customers stayed away, leading to more layoffs and the first decline in employment since the onset of the pandemic last spring.

Yet in many ways the economy held up better than expected as individuals and companies adapted to the crisis better than they did earlier in the year. Consumer spending and business investment both rose and a housing market boom showed no letup.

The economy still has lots of ground to make up, however, and a full recovery can’t take place until the vaccines become more widespread and the coronavirus peters out.

“There’s nothing more important to the economy right now than people getting vaccinated,” Federal Reserve Chairman Jerome Powell said Wednesday at a news conference.

Read: Durable-goods orders and business investment climb for eighth month in a row

What happened: Consumer spending, by far the biggest part of the economy, rose at a 2.5% annual clip in the fourth quarter.

More layoffs and the temporary expiration of federal aid for unemployed workers likely held spending down.

Business investment was stronger than expected, however. Spending on equipment jumped almost 25%, and in a surprise, outlays on structures such as office buildings advanced 3% in the fourth quarter.

Companies also continued to rebuild inventories after letting them draw down during the worst of the pandemic, signaling they expect stronger sales in the months ahead. The change in the value of stockpiled goods rose by $48.3 billion in the fourth quarter.

Housing was another strong performer.

Investment in new houses leaped 33.5% as builders sought to meet rising demand. The lowest mortgage rates in modern times have drawn in swarms of buyers, though higher home prices might act as a deterrent if they keep rising.

Government spending fell 1.2%, largely because of declines at the state and local level.

Trade was a drag as it often is. Exports rose 22%, but imports increased at a at a faster 30% clip. A bigger trade deficit subtracts from GDP.

The rate of inflation increased at annualiZed 1.5% in the fourth quarter. Inflation is low by virtually ever measure, however, and poses little risk to the economy.

See: MarketWatch Coronavirus Recovery Tracker

The big picture: The economy absorbed another major blow from the coronavirus at the end of last year, but it proved more resilient. Governments issued fewer and more narrow restrictions on business and most companies were better able to adapt and improvise.

Stable growth should provide a good launching point for the economy in 2021 if the vaccines prove effective and the pandemic begins to evaporate. Strong business investment offers a clear sign that companies are banking on a much better economy this year.

Market reaction: The Dow Jones Industrial Average
DJIA,
-2.05%

and S&P 500
SPX,
-2.57%

were set to open mixed in Thursday trades.

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