• Real GDP increased 4.0% at an annualized rate in the fourth quarter of 2020.
• Real GDP in the fourth quarter of 2020 was 2.5% below its peak before the pandemic.
• Most components added to growth in the fourth quarter, although trade and government were drags.
• Growth is set to slow substantially in the first quarter of 2021, and then pick up in the rest of the year. 

Real GDP increased 4.0% at an annualized rate in the fourth quarter of 2020. This was close to the consensus expectation. After falling 5.0% annualized in the first quarter of 2020 and then a record 31.4% in the second quarter as the pandemic hit the U.S. economy, growth bounced back to 31.4% annualized in the third quarter, also a record. Still, the economy at the end of 2020 was 2.5% smaller than it was in the fourth quarter of 2019, before the pandemic.

Most components added to GDP growth in the fourth quarter. Consumer spending increased 2.5% annualized, adding 1.7 percentage points to growth. Nonresidential fixed business investment rose almost 14%, adding 1.7 percentage points to growth, with an especially large increase in investment in equipment. Investment in residential structures rose 33.5% annualized, adding 1.3 percentage points to growth, as homebuilding has boomed with extremely low mortgage rates. Inventories added 1 percentage point to growth in the quarter as businesses continued to restock their shelves.

Exports were a drag, however, subtracting 1.5 percentage points from growth. Both exports (+22% annualized) and imports (+29.5% annualized) rose in the quarter, but because imports rose more than exports, the trade deficit grew. Imports are rising sharply as consumers purchase more goods from abroad as the economy picks back up and they spend less on services like entertainment and travel.Government subtracted 1.2 percentage points from growth, with declines in both federal and state and local purchases.

Economic growth was solid in the fourth quarter, although it slowed from the torrid pace of the third quarter. Economic growth over the summer was very strong as businesses reopened and consumers spent their stimulus funds, after being shut-in because of the pandemic earlier in the year. But the big boost from re-openings faded in the fourth quarter and growth slowed.

Growth is likely to be very weak in the first quarter of 2021, below 1% annualized. With record-high caseloads early in the year consumers have turned more cautious and states have re-imposed additional restrictions on economic activity, although in a more targeted fashion than in the early stages of the pandemic.

But growth should pick up through the rest of 2021. The rollout of vaccines and warmer weather will give consumers much more freedom to venture out, and stimulus payments in early 2021 will allow them to increase their spending. PNC expects real GDP growth of above 3% from the fourth quarter of 2020 to the fourth quarter of 2021. The possibility of additional stimulus from the Biden administration and a Democratic House and Senate adds upside potential to the outlook.

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.