By Harriet Torry

The U.S. economy grew steadily in the fourth quarter of 2020 and is forecast to continue recovering this year from the effects of the pandemic.

Yet despite a strong rebound in the second half of last year, the economy contracted 3.5% in 2020, measured year over year, the first decline since the 2008 financial crisis and the largest since 1946. Measured from the fourth quarter to the same quarter a year earlier the economy shrank 2.5%

Fourth-quarter U.S. gross domestic product -- the value of all goods and services produced across the economy, adjusted for seasonality and inflation -- grew by 4%, the Commerce Department said on Thursday. That joined a record gain in the third quarter to further reduce losses from earlier in the pandemic.

Economists project that growth will pick up this year once the pandemic is under control, though the coronavirus remains a threat to the global economy.

"We still have a ways to go but it's positive," Beth Ann Bovino, U.S. chief economist at S&P Global Ratings, said of U.S. growth. "It's a slow heal," she added, pointing to still-hurting parts of the economy such as in-person services businesses and energy production.

Consumer spending, which accounts for more than two-thirds of U.S. economic output, slowed considerably in the fourth quarter compared to the prior quarter. Continued strength in corporate and residential housing investment, however, has helped set the economy up "for what could be a really good 2021," said James Knightley, an economist at ING Financial Markets LLC.

He said stimulus checks from the December coronavirus-aid package, the prospect of additional government aid this year, high household savings and vaccination programs point to a continued recovery. "There's basically a wall of money being thrown at the economy," Mr. Knightley said.

The Labor Department separately said the number of workers seeking unemployment benefits dropped last week, indicating a recent easing in the pace of layoffs, though the labor market remains mired in a winter slowdown. New jobless claims, a proxy for layoffs, dropped to 847,000 in the week ending Jan. 23, down from a revised 914,000 the week before. Claims have for months remained well above the pre-pandemic peak of 695,000.

The coronavirus and related business restrictions put in place early in the pandemic upended the U.S. economy early last year, triggering business and school closures, a steep drop in demand for goods and services and record job losses.

The economy rebounded in the second half of the year as it reopened, with sharp gains in employment and consumer spending over the summer that were helped by trillions of dollars in government aid.

The International Monetary Fund expects the U.S. economy to grow 5.1% this year, while economists surveyed by The Wall Street Journal projected 4.3% growth, measured from the fourth quarter of the prior year.

Economists expect hiring to start slowly this year, after employers shed jobs in December. But they also expect momentum to grow later, as Covid-19 vaccines become more widely available, hospital burdens ease and consumers resume activities such as dining out, attending sporting events and taking vacations.

Other factors at play include accumulated savings from those who continued to work but reduced spending during the pandemic.

Households saved an outsize share of disposable income in 2020. The personal-saving rate -- the portion of after-tax income that consumers don't spend -- was a seasonally adjusted 13.4% in the fourth quarter, compared with 7.3% a year earlier. Economists say the extra financial buffer should support greater spending once pandemic restrictions ease.

A pickup in spending would in turn lead to more hiring, particularly in some of the hardest-hit sectors such as restaurants, hotels, stores and personal services.

"We expect there to be plenty of growth over the late spring and summer as the service sector of the economy ramps back up," said Daniil Manaenkov, an economic forecaster at the University of Michigan.

Several states, including California and New York, have recently rolled back restrictions, and many Southern states essentially have no restrictions, Mr. Manaenkov said. That allows for activity to grow quickly once consumers feel good about heading out, he said.

U.S. employers are poised to add more than five million jobs this year, according to economists surveyed by the Journal. That would make 2021 the best year for employment gains in records dating to 1939, topping 4.3 million jobs created in 1946 at the start of the post-World War II expansion.

Still, even record-setting hiring this year would leave the U.S. millions of jobs short of pre-pandemic employment heading into 2022.

The impact of the pandemic has been unevenly felt across the country, with some regions such as the South holding up better than others.

And some industries have thrived, such as technology companies , logistics businesses and online retailers, while others such as in-person services businesses struggled.

Patty Casey, manager of the Bellezza Salon in Omaha, Neb., said she is optimistic about 2021. "Anything's going to be an improvement over 2020. People are going to get vaccinated and are going to feel better about coming in."

The salon shut down for two months last spring and two weeks in November, but now "people are slowly starting to come back," Ms. Casey said.

Consumer spending slowed to a 2.5% seasonally adjusted annual rate in the holiday quarter, down from a 41% rebound in the third quarter, as consumers pulled back from shopping amid high coronavirus infection rates and business closures in some regions.

Overall spending on goods declined in the fourth quarter. And spending on durable goods -- products designed to last at least three years such as furniture and washing machines -- was flat, following increased spending in the prior quarter as households purchased home entertainment, fitness and office supplies as they worked from home.

The housing market continued to perform strongly, as families confined at home bought bigger residences or spent money on improving their properties. Residential fixed investment rose at a 33.5% pace in the fourth quarter from the prior quarter, compared with a 63% rate in the third.

Businesses also spent at a solid pace. Nonresidential fixed investment -- which reflects spending on software, research and development, equipment and structures -- rose at a 13.8% rate from October through December.

Michael Stephans, co-owner of the Velvet Shoestring, a high-end furniture resale and décor shop in Williamsburg, Va., said business has been good and sales held steady during the holidays, months that are typically slower because "a sectional sofa is not a Christmas item."

"I think a lot more people have conserved money on vacations and things like that. So they're spending them in the house," he said.

For Hank Saipe, who owns five self-storage facilities in Denver, Covid-19's impact has been relatively minor. Occupancy rates are up from last year as more people are moving house and setting up home offices during the pandemic, which means he has been able to raise rental rates, too.

Regarding the pandemic more broadly, the 65-year old said he is "trying to be as strict as possible," wearing masks and limiting travel until he gets a vaccine. It has been a year since he last visited a theater or went to the movies, and he does curbside pickup from restaurants rather than dining inside. "I'm looking forward to my daughter's wedding in August. Hopefully, we can have it," Mr. Saipe said.

--Eric Morath and

Hannah Lang

contributed to this article.

Write to Harriet Torry at harriet.torry@wsj.com

(END) Dow Jones Newswires

01-28-21 1330ET