Key Points
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US GDP grew at a 1.4% annual rate in the fourth quarter of 2025.
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Government shutdown cut roughly 1 percentage point from growth.
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Core inflation held firm at about 3%, above the Federal Reserve target.
Washington, D.C.: The US economy lost momentum in the final months of 2025, expanding at an annualized rate of just 1.4 percent as a prolonged government shutdown and softer consumer spending weighed on growth.
The Commerce Department report showed a steep drop from the third quarter’s 4.4 percent pace and came in below economist expectations. For the full year, the economy grew 2.2 percent, marking the slowest annual expansion since the pandemic era.
Economists pointed directly to the federal shutdown, which lasted through much of the quarter. Officials estimated the disruption shaved about 1 percentage point off overall growth, though much of that loss is expected to reverse in early 2026.
Consumers show signs of strain
Consumer spending, the primary engine of the US economy, cooled to a 1.4 percent annual pace in the fourth quarter, the weakest showing since early 2025. Lower income households continued to feel pressure from rising debt levels, cumulative inflation and a softer job market.
Brett Ryan, senior US economist at Deutsche Bank, said some of the slowdown was anticipated after households pulled forward major purchases earlier in the year, including vehicles tied to expiring electric vehicle tax credits.
Despite the moderation, Ryan said there is “certainly nothing that would get you too concerned about an imminent consumer slowdown,” noting that tax refunds could support spending in early 2026.
Business investment and AI spending provide support
Not all sectors weakened. Business investment edged higher to roughly 3.7 percent growth, supported in part by continued spending tied to artificial intelligence infrastructure.
Stephanie Roth, chief economist at Wolfe Research, described the overall growth picture as surprisingly resilient given tighter labor supply conditions. “You could call it Goldilocks,” she said, pointing to steady but cooler expansion.
Inflation remains stubborn
Separate Commerce Department data showed inflation pressures remain elevated. The core personal consumption expenditures index, the Federal Reserve’s preferred gauge, rose about 3 percent annually in December, while headline PCE reached roughly 2.9 percent.
Monthly price gains of 0.4 percent were driven largely by goods costs, including furniture, appliances and toys, areas economists say have been influenced by tariff-related price pressures.
Meanwhile, household finances showed signs of softening. Personal income growth was flat after adjusting for inflation, and the savings rate fell to 3.6 percent, its lowest level since October 2022.
Outlook for 2026
Many economists expect some rebound early this year as shutdown effects fade and tax refunds flow into household budgets. Still, the combination of slower growth and persistent inflation leaves the Federal Reserve in a cautious position as policymakers weigh interest rate decisions.
For now, the data suggests the US economy is cooling but not contracting, with underlying demand still holding up even as momentum fades.
