US Economic Recovery Slows Following Record Q3 Expansion

Comment on US GDP report for Q4 2020 -- Erik Lundh, Senior Economist, The Conference Board

US Real Gross Domestic Product grew by 4.0 percent (annualized) during the fourth quarter of 2020, above the consensus forecast and The Conference Board’s forecast of 3.5 percent. This quarterly annualized growth rate was down significantly from the 33.4 percent rate seen in Q3, when the economy rebounded from the strict lockdowns in the spring. Growth contributions from both household goods consumption and government spending were negative for the quarter, hurting growth. However, stronger household services consumption, residential investment and business investment in equipment propped growth up. Additionally, import growth outperformed export growth resulting in an additional drag to the recovery. 

While this growth rate shows improved economic output from one quarter to the next, it does not fully capture the deceleration in the recovery seen in November and December. Recent economic indicators, including initial unemployment claims and retail sales, meaningfully weakened at the end of the year – suggesting that the recovery was stalling. A surge in new COVID-19 cases and renewed lockdowns in some parts of the country were behind this trend. 

However, as we enter 2021 there is room for greater optimism. New COVID-19 cases are beginning to decline, two vaccines are now being distributed around the country, a $900 billion fiscal support package is currently being deployed, and an additional fiscal stimulus package worth as much at $1.9 trillion is on the table. We therefore expect US economic growth to pick up in the coming months and to rebound sharply in Q3 2021. Much of this strength will be seen in consumer spending on services, which has been among the hardest hit sectors in the economy over the course of the pandemic. 

The Bureau of Economic Analysis also reported its advanced estimate of 2020 Real Gross Domestic Product growth at -3.5 percent year-over-year, which was in-line with The Conference Board’s forecast. This rate was down from 2.2 percent in 2019 and was the largest annual economic contraction seen since World War II. For 2021, we expect US annual Real GDP growth to rise to 4.1 percent.

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