The U.S. economy grew 1.4% in Q4, significantly below forecasts, as inflation edged up to 3%, highlighting a challenging end to 2025 marked by slower consumer activity and the disruptive impact of a prolonged government shutdown.
According to fresh data from the Commerce Department, gross domestic product expanded at an annualized rate of just 1.4% in the fourth quarter — far short of the 2.5% increase economists had anticipated. The slowdown followed a much stronger 4.4% growth pace in the third quarter, signaling a notable loss of momentum.
Government Shutdown Weighs on Growth
A key factor behind the softer numbers was the record-length federal government shutdown that stretched from October 1 to November 12. The Commerce Department estimated the shutdown shaved roughly one percentage point off GDP, though officials acknowledged that the precise impact is difficult to measure.
Government spending and investment declined 5.1% overall during the quarter. Federal spending alone plunged 16.6%, only partially balanced by a 2.4% rise in spending at the state and local level.
For the full year 2025, the economy grew at a 2.2% pace, down from 2.8% in 2024, reflecting broader headwinds beyond the shutdown.
Chris Rupkey, chief economist at Fwdbonds, described the shutdown as a major disruption that pushed the economy off its stronger growth path late in the year, though he suggested the drag is unlikely to repeat in early 2026.
Trump Criticizes Fed and Shutdown Fallout
Ahead of the GDP release, former President Donald Trump warned that the figures would appear weak, attributing the softness to the shutdown. In a post on Truth Social, he argued that the closure cost the U.S. “at least two points” in GDP and called for lower interest rates.
Trump also renewed criticism of Federal Reserve Chair Jerome Powell, urging more aggressive rate cuts.
The Federal Reserve reduced its benchmark interest rate by three-quarters of a percentage point in late 2025. However, policymakers have recently signaled a more cautious stance as they weigh inflation risks against potential labor market weakness.
Consumer Spending and Trade Lose Steam
Consumer activity, the primary engine of the U.S. economy, moderated during the quarter. Personal consumption expenditures increased 2.4%, down from a robust 3.5% rise in the previous quarter.
Exports also reversed course, falling 0.9% after surging 9.6% in Q3. Together, the pullback in spending and trade contributed significantly to the softer headline growth number.
Still, not all indicators were weak. Final sales to private domestic purchasers — a measure closely watched by the Fed to gauge underlying demand — rose 2.4%. Although slightly lower than the previous quarter, it suggested that core domestic demand remained stable in the $31.5 trillion U.S. economy.
Gross private domestic investment also rebounded, climbing 3.8% after being flat in Q3, pointing to continued business confidence despite broader uncertainty.
Inflation Remains Stubbornly Elevated
Even as growth slowed, price pressures showed little sign of easing.
The core personal consumption expenditures (PCE) price index — which excludes volatile food and energy costs and is the Federal Reserve’s preferred inflation gauge — rose 3% in December, up 0.2 percentage point from November. On a headline basis, the PCE index increased 2.9%, slightly above expectations.
Both measures rose 0.4% for the month, exceeding forecasts of 0.3%.
Goods prices climbed 0.4%, while services increased 0.3%, indicating that inflation pressures remain relatively broad-based rather than concentrated in one area. Policymakers have been closely watching whether price increases stem from temporary supply factors, such as tariffs, or from more persistent demand-driven forces in the services sector.
Outlook: A Potential Rebound in 2026?
Economists suggest the slowdown could prove temporary if the effects of the shutdown fade in early 2026. Heather Long, chief economist at Navy Federal Credit Union, noted that while the shutdown hurt late-year growth, the broader economy demonstrated resilience throughout 2025.
Strong consumer demand earlier in the year and continued momentum from artificial intelligence-related investment helped keep overall growth positive despite multiple headwinds.
While the fourth-quarter GDP number paints a softer picture, underlying demand indicators and business investment suggest the U.S. economy may still have a stable foundation — provided inflation moderates and fiscal disruptions remain contained.
