U.S. gross domestic product (GDP) rose in the fourth quarter of 2020, according to data out this morning from the Bureau of Economic Analysis. Specifically, real GDP, which measures the value of the production of goods and services in America adjusted for price changes (inflation), increased at an annual rate of 4.0 percent in Q4. That was a slightly smaller gain than analysts expected but any real forecasting precision remains unlikely in the near-term given the ongoing economic disruptions caused by the pandemic and related activity restrictions. At the very least last quarter’s change in GDP was much closer to “normal” when compared to the -31.4 percent decline and +33.4 percent increase seen in Q2 and Q3 of last year, respectively. Under the hood, the largest contributor in Q4 to the continued rebound in overall economic output was consumer spending and this will remain the case going forward. In 2020 consumption was propped up in large part by unprecedented levels of financial relief provided by the government via the CARES Act and other emergency initiatives.
This year, particularly after the vaccine rollout is complete and the economy can fully reopen, we will want to see consumer spending be self-sustaining once the influx of stimulus money presumably ends. Fortunately household finances may not be the main limiting factor here because millions of Americans were able to remain employed throughout this crisis and in turn use their $1200 and $600 relief checks to shore up their balance sheets (pay down debt or pad emergency savings). Sentiment is therefore more likely to be the main determinant of spending behavior in 2021, and encouragingly The Conference Board’s consumer confidence index started the new year on a positive note. Indeed, the headline index rose to 89.3 in January, better than anticipated and helped by a large increase in surveyed Americans’ optimism about the future. Opinions of the present economic situation, though, deteriorated in January and remained a key reason why the confidence gauge has experienced a more sluggish rebound compared to other economic indicators. The Conference Board’s researchers similarly observed that “Consumers’ appraisal of present-day conditions weakened further in January, with COVID-19 still the major suppressor. Consumers’ expectations for the economy and jobs, however, advanced further, suggesting that consumers foresee conditions improving in the not-too-distant future. In addition, the percent of consumers who said they intend to purchase a home in the next six months improved, suggesting that the pace of home sales should remain robust in early 2021.”
Sources: Econoday, U.S. DoC, The Conference Board, FRBSL