Updated at 1:12 p.m. ET
The nation's economic engine slowed considerably in recent months, as it faced off against a winter wave of coronavirus infections.
The Commerce Department reported Thursday that the nation's gross domestic product grew just under 1% in October, November and December — a marked downshift from the three previous months. On an annualized basis, the economy grew 4% in the fourth quarter.
GDP was 2.5% smaller at the end of the year than when it began. Economic activity plunged last March and April when the pandemic took hold. The economy staged a partial comeback in the summer and early fall, only to falter in the last three months of the year.
Forecasters expect to see stronger economic growth this year, if the new vaccination campaign is successful in getting control of the pandemic.
"There's nothing more important to the economy now than people getting vaccinated," Federal Reserve Chairman Jerome Powell said Wednesday.
The Federal Reserve highlighted the pandemic's drag on economic activity in a statement Wednesday, while renewing the agency's promise to leave interest rates near zero for an extended period.
"We're a long way from a full recovery," Powell said.
Key sectors such as leisure and hospitality have been hit hard by the pandemic's winter surge. Ben Herzon, a senior economist with IHS Markit, said were it not for the $900 billion rescue package that Congress passed in the final weeks of December, the economy might have started 2021 with a double-dip recession.
The 1% growth rate in the fourth quarter is a significant slowdown from the previous three months, when GDP grew nearly 7.5%. That followed a steep drop of nearly 9% in the second quarter.
(The Commerce Department typically reports quarterly GDP changes at annualized rates, which exaggerates swings, both up and down. Measured on an annualized basis, third-quarter GDP grew 33.4% after a drastic 31.4% contraction in the second quarter.)
"We got a really strong third quarter, and then things started to fizzle out a little bit," Herzon said.
Hurt most in the last three months of the year were restaurants and in-person entertainment businesses such as movie theaters, as a winter wave of coronavirus infections and deaths made consumers nervous about going out. The leisure and hospitality segment of the economy lost nearly 500,000 jobs in December.
Other segments of the economy have fared better. Manufacturing and homebuilding continue to bounce back from their pandemic slump, and consumption of goods is higher now than it was before the coronavirus struck.
"There are some strengths," Herzon said. "It's just that services, which is a very large part of the economy, is really struggling to get back to where it was."
With COVID-19 still killing around 4,000 Americans every day, economic activity is likely to remain subdued for the next several months. But if new vaccines are successful in stopping the pandemic, the economy is poised for a strong recovery in the second half of this year.
"The economy remains in a delicate spot," said Jim Baird, chief investment officer for Plante Moran Financial Advisors. "The good news is that the light at the end of the tunnel is approaching, as vaccine distribution accelerates and we move closer to herd immunity."
The International Monetary Fund expects the U.S. economy to grow 5.1% in 2021 and match its pre-pandemic level sometime in the second half of the year.
Any forecast, however, comes with a number of question marks: How smoothly will the vaccine rollout go? What is the impact of new coronavirus variants? And how much more money will consumers spend once the pandemic is under control?
Americans who have kept working during the pandemic have socked away about $1.3 trillion in extra savings during the past year, according to Pantheon Macroeconomics. That could provide a significant boost to the economy, if and when they decide to spend it.
"You probably won't get more haircuts than you otherwise would have," Herzon said. "But maybe people are really tired of staying home, and they will go out to eat more than they would have otherwise."
Additional fuel could come from the federal government if Congress approves another round of $1,400 relief checks, or other parts of President Biden's proposed $1.9 trillion package to rescue the economy.
A surge in demand for airline tickets and restaurant reservations that suddenly outstrips supply could trigger a jump in prices. But the Federal Reserve is not overly concerned that short-term price hikes will lead to runaway inflation.
"We're going to be patient," Powell said. "Expect us to wait and see and not react if we see small and what we would view as very likely to be transient effects on inflation."
SARAH MCCAMMON, HOST:
New numbers out this morning show that the nation's economy slowed considerably in recent months during the winter wave of coronavirus infections. That put the brakes on the rapid rebound we saw in the summer and early fall. NPR's Scott Horsley has been digging into this report from the Commerce Department, and he's with us now. Hey, Scott.
SCOTT HORSLEY, BYLINE: Good morning, Sarah.
MCCAMMON: So what does it tell us about the last three months of last year?
HORSLEY: It shows the economy grew just under 1% in October, November and December. That's a significant downshift from the summer and early fall, when the economy expanded nearly 7.5% as businesses were reopening after those pandemic lockdowns in the spring. All told, we ended 2020 with an economy about 2.5% smaller than it was when the year began. Now, some industries are doing OK despite the pandemic. You know, construction is booming. Manufacturing is pretty strong. It's in-person businesses like restaurants, bars, hotels that are really struggling. And Federal Reserve Chairman Jerome Powell says that's a big part of the economy. Until it's fixed, we're not going to be out of the woods.
(SOUNDBITE OF ARCHIVED RECORDING)
JEROME POWELL: We're a long way from a full recovery. Something like 9 million people remain unemployed as a consequence of the pandemic. That's as many people as lost their jobs at the peak of the global financial crisis and the Great Recession.
HORSLEY: Now, that is an improvement from the worst point last year, when we were down some 22 million jobs. But it's still painful. And just this morning, we learned another close to 1.3 million people filed new claims for unemployment last week.
MCCAMMON: And what's it going to take to make that up?
HORSLEY: Getting control of this virus? You know, the Fed is doing its part. They're keeping interest rates near zero. Late last month, Congress came through with another round of relief payments. President Biden's pushing Congress to do more of that. But ultimately, Fed Chairman Powell says the economic recovery is going to depend on solving the public health problem.
(SOUNDBITE OF ARCHIVED RECORDING)
POWELL: There's nothing more important to the economy now than people getting vaccinated. If you think about the places where the economy is weak, I mentioned bars and restaurants. That's 400,000 jobs we lost last month. And that's all because of the spread of the pandemic.
HORSLEY: Powell, who is 67 years old, got his first shot of vaccine not long ago. He says he expects to get a second dose pretty soon. But we know it's going to take months until everybody who wants a vaccine in the country can have one. And in the meantime, public health experts are saying wearing face masks, following social distancing guidelines can also help.
MCCAMMON: So looking ahead, Scott, what is the outlook for the economy this coming year?
HORSLEY: Well, right now, we are still seeing thousands of COVID-19 deaths every day. And that is going to continue to weigh on economic activity for at least a few more months. If we are successful, though, in stopping the pandemic, we could see the economy grow pretty rapidly in the second half of the year. Ben Herzon is a senior economist at IHS Market. He says there could be a lot of pent-up demand for the kind of in-person services that we've been missing for these last 10 months or so, although he cautions it's not entirely clear that all the money that wasn't spent last year will suddenly come pouring into the economy right away - some will, some won't.
BEN HERZON: One example is haircuts. You probably won't get more haircuts than you otherwise would have. But maybe people are really tired of staying at home and they will go out to eat more than they would otherwise.
HORSLEY: The combination of vaccines and some additional government spending does have folks raising their forecast for the coming year. The International Monetary Fund, for example, now predicts the economy will grow more than 5% in 2021. That would bring us all the way out of the hole we were in last year and put the economy back on pre-pandemic footing sometime in the second half of the year.
MCCAMMON: I don't know about you, Scott, but I need at least one haircut. Thanks for being with us.
HORSLEY: (Laughter) Good to be with you.
MCCAMMON: Scott Horsley, NPR's chief economics correspondent. Transcript provided by NPR, Copyright NPR.