2020 GDP Estimates Harken Back to the Depression, WWII

SOLVANG, CA - NOVEMBER 28: Groups of people, most wearing facemasks, take over the sidewalks in downtown on November 28, 2020, in Solvang, California. Despite a rapidly rising surge of cases and deaths in California, and lack of a Julefest parade and other holiday festivities, thousands of tourists, primarily from Southern California and Los Angeles continue to flood into this Danish-themed Central Coast community each weekend.

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The U.S. had the worst annual decline in gross domestic product (GDP) since World War II and the largest drop in annual consumer spending since the Great Depression last year, government estimates showed Thursday. 

GDP for 2020 shrank 3.5%, the Bureau of Economic Analysis (BEA) reported, more than any decline in annual GDP since 1946, when the end of production for World War II caused it to fall 11.6%. While GDP was down for the year, fourth-quarter GDP grew at an annualized rate of 4%, close to the 4.2% expected by economists and significantly subdued from the 33.4% growth rate in the third quarter, when the economy was rebounding from the pandemic-triggered crash of the second quarter.

Despite the growth in the second half of the year, it wasn’t enough to make up for COVID-19’s impact in the first half. Overall personal consumption expenditures also fell 3.9% in 2020 as the pandemic upended both daily life and buying habits. The last year to see a drop this large was 1932, when GDP fell 9%, BEA data showed.

Still, economists were impressed at how resilient the U.S. economy has proven itself to be amid the turmoil.

“The economy is now only 2.5% below pre-pandemic levels, which, in light of what has happened, is a remarkable outcome,” James Knightley, chief international economist for ING, wrote in a commentary.

Knightley predicts healthy growth of 5% or more in 2021, when the rollout of vaccines against COVID-19 should enable a return to more normal life and economic activity. 

“Once the reopening gets underway we expect to see consumer spending leading the charge with pent-up demand focused on the leisure, travel, and entertainment sectors,” he wrote. Households are “cash rich,” he wrote, especially because government support programs are buoying lower-income households.