Retail space for lease in the midtown area of Manhattan in New York City. Consumer spending, which accounts for more than two-thirds of the United States economy, plunged 3.9 per cent, the worst performance since 1932.

WASHINGTON • The United States economy contracted at its deepest pace since World War II in 2020 as the Covid-19 pandemic depressed consumer spending and business investment, pushing millions of Americans out of work and into poverty.

Though a recovery is under way, momentum slowed significantly as the year wound down amid a resurgence in coronavirus infections and exhaustion of nearly US$3 trillion (S$4 trillion) in relief money from the government.

The moderation is likely to persist at least through the first three months of this year.

The economy’s prospects hinge on the distribution of vaccines to fight the virus.

President Joe Biden has unveiled a recovery plan worth US$1.9 trillion, but some lawmakers have baulked at the price tag as the initiative comes soon after the government provided nearly US$900 billion in additional stimulus late last month.

White House economic adviser Brian Deese said the report from the Commerce Department on Thursday underscored the urgency for Congress to pass Mr Biden’s plan, warning that the cost of doing nothing was too high.

“Without swift action, we risk a continued economic crisis that will make it harder for Americans to return to work and get back on their feet,” said Mr Deese.

Gross domestic product (GDP) fell 3.5 per cent last year, the biggest drop since 1946. That followed 2.2 per cent growth in 2019, and was the first annual decline in GDP since the 2007-09 Great Recession.

Nearly every sector, with the exception of the government and the housing market, contracted last year. Consumer spending, which accounts for more than two-thirds of the economy, plunged 3.9 per cent, the worst performance since 1932. The economy tumbled into recession last February.

Delays by the government in offering another rescue package and renewed business disruptions caused by the virus restricted GDP growth to a 4 per cent annualised rate in the fourth quarter. The big step-back from a historic 33.4 per cent growth pace in the third quarter left the GDP 2.5 per cent below its level at the end of 2019.

The economy is expected to return to its pre-pandemic level in the second quarter of this year.

The Federal Reserve on Wednesday left its benchmark overnight interest rate near zero and pledged to continue pumping money into the economy through bond purchases, noting that “the pace of the recovery in economic activity and employment has moderated in recent months”.

With the coronavirus still raging, economists are expecting growth to slow to below a 2 per cent rate in the first quarter, before regaining speed by summer as the additional stimulus kicks in and more Americans get vaccinated.

“We foresee record-breaking consumer spending growth in 2021 with households benefiting from a watered-down US$1.2 trillion version of Biden’s rescue plan, vaccine diffusion gradually reaching two-thirds of Americans by July and employment accelerating this spring,” said Mr Gregory Daco, chief US economist at Oxford Economics in New York.

Stocks on Wall Street rallied as mega-cap technology shares tried to recoup recent losses. The dollar slipped against a basket of currencies. US Treasury prices were lower.

Service businesses like restaurants, bars and hotels have borne the brunt of the recession, disproportionately impacting lower-wage earners, mostly women and minorities. That has led to a so-called K-shaped recovery, where better-paid workers are doing well while lower-paid workers are losing out.

The stars of the recovery have been the housing market and manufacturing as those who are still employed seek larger homes away from city centres, and buy electronics for home offices and schooling.

Rising poverty was highlighted by persistent labour market weakness.

In a separate report on Thursday, the Labour Department said initial claims for state unemployment benefits totalled a seasonally adjusted 847,000 for the week ended Jan 23. While that was down by 67,000 from the previous week, claims remain well above their peak of 665,000 during the Great Recession.

Including a government-funded programme for the self-employed, gig workers and others who do not qualify for the regular state unemployment programmes, 1.3 million people filed claims last week.

The economy shed jobs last month for the first time in eight months. Only 12.4 million of the 22.2 million jobs lost last March and April have been recovered.

About 18.3 million Americans were receiving unemployment cheques early this year.

“The labour market is struggling this winter, but better times are ahead,” said Mr Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.