The U.S. Economy grew at a significantly slower pace than expected in the final quarter of last year. The Bureau of Economic Analysis (BEA) reported Friday that the Gross Domestic Product (GDP) advanced at an annualized rate of 1.4% in the fourth quarter of 2025, a substantial drop from the 4.4% growth recorded in the third quarter.
The preliminary estimate, released by the Department of Commerce, fell far short of the 2.8% annualized growth rate consensus among analysts. Despite the slowdown, the U.S. Economy expanded by 2.2% for the entirety of 2025.
The deceleration in real GDP during the fourth quarter was attributed to declines in government spending and exports, as well as a moderation in consumer spending. These were partially offset by an acceleration in investment, according to the BEA. A decrease in imports was also less pronounced than in the previous quarter.
Personal consumption expenditures, typically a key driver of GDP accounting for over a third of the total, showed a marked slowdown, decreasing from an annualized rate of 3.5% to 2.4%. However, the most significant drag on growth was a 5.1% annualized decline in government spending, coinciding with a government shutdown lasting over 40 days between October and November.
Federal government spending contracted at an annualized rate of 16.6%, subtracting 1.2 percentage points from overall GDP. Prior to the data release, President Donald Trump posted on social media that the “Democrat” shutdown would cost the U.S. “at least two points of GDP.”
“The government shutdown proved to be a much larger drag on the economy than Treasury data had suggested,” noted Paul Ashworth, an economist at Capital Economics. He anticipates a reversal of this trend in the first quarter of 2026, forecasting GDP growth to exceed 3%.
Final sales to domestic private purchasers, a metric closely watched by analysts and Federal Reserve Chairman Jerome Powell, continued to increase at a healthy pace of 2.4% annualized. Business investment also demonstrated strength, rising by 3.7% annualized. Details revealed that investment in computers, software, and research and development collectively contributed approximately 1 percentage point to GDP growth, reflecting the ongoing impact of artificial intelligence (AI).
Inventories added a modest 0.2% to GDP growth, while net exports (exports minus imports) contributed an additional 0.1%. Ashworth clarified that the BEA excluded silver exports, which were primarily investment transactions.
Despite the year-end slowdown, the overall data indicates a solid performance for the U.S. Economy in 2025. The economy contracted in the first quarter due to a surge in imports before the imposition of tariffs, but ultimately finished the year with one of the strongest global growth rates. This shift followed Trump’s removal of more punitive tariffs and the Federal Reserve’s reduction of interest rates by 175 basis points since September 2024, contributing to record highs in the stock market and sustained spending by wealthier Americans.
Economists express optimism for 2026. Michael Pearce, chief U.S. Economist at Oxford Economics, stated, “The prolonged federal government shutdown and the expiration of the electric vehicle tax credit weighed on GDP growth in the fourth quarter, but the core of the economy remains resilient. With easing trade pressures and fiscal policy easing beginning to boost capital spending, the economy should regain momentum in 2026.”
Pearce also anticipates a strong rebound in consumer spending, despite a recent dip in goods spending, with services spending remaining robust. He acknowledged that winter weather may have dampened January spending but expects a strong recovery in the coming months, driven by larger tax refunds.
“Investment growth continues to be led by AI-related categories, but there are signs that the strength in equipment investment is beginning to broaden, and we expect that to turn into more important in 2026 as the impact of the fiscal easing is felt,” Pearce added.
Commerzbank analysts share this outlook, citing favorable financing conditions, rising stock prices, a weaker dollar, the continued AI boom, and anticipated fiscal stimulus as factors supporting strong growth in 2026, with a projected growth rate of 3% for the year.
Separate data released by the BEA Friday showed that the Federal Reserve’s preferred measure of underlying inflation, the core Personal Consumption Expenditures (PCE) price index (excluding food and energy), rose 0.4% in December (a rounded figure of 0.36%), the largest increase in nearly a year. Year-over-year, the core PCE increased by 3%, up from 2.8% earlier in 2025. Despite this, the central bank’s policy path remains unchanged, with interest rate cuts on hold, at least for the March meeting, and further reductions anticipated throughout the year.
“We expect this to prove a peak and inflation to fall back to 2.3% by the end of the year. With the economy stabilizing and the labor market on a firm footing, and inflation still elevated, we expect the Fed to remain in wait-and-see mode,” Pearce concluded.
