US economic growth slowed to 1.4% in Q4 as a government shutdown hit spending, while inflation stayed stubbornly high, complicating the Fed’s policy outlook.
The American economy closed out last year with an unexpected loss of momentum, as a prolonged government shutdown and more cautious households combined to drag growth well below expectations.
Gross domestic product expanded at an annualised rate of just 1.4% in the fourth quarter, according to data released Friday by the US Commerce Department.
The reading marked a sharp slowdown from the 4.4% pace recorded in the third quarter and fell well short of the 2.5% growth economists had pencilled in.
The weaker print suggested that the world’s largest economy cooled more abruptly at the end of the year than markets had anticipated, even as it continued to outperform many other advanced economies.
US government shutdown takes a heavy toll
Much of the shortfall was tied directly to the government shutdown that disrupted activity last autumn.
Federal spending declined at a steep 16.6% annual rate during the quarter, knocking almost a full percentage point off overall growth.
The furlough of hundreds of thousands of federal workers without pay also weighed on household outlays, adding to the drag from reduced public-sector activity.
Economists said that, absent the shutdown, GDP growth would likely have landed much closer to Wall Street’s forecasts.
Until recently, the economy’s so-called speed limit — the rate at which it can grow without generating destabilising inflation — was widely seen to be around 1.8%, making the fourth-quarter result particularly soft by historical standards.
A year of uneven momentum
Friday’s report capped a year marked by sharp swings in economic performance.
GDP rebounded from a mild contraction in the first quarter to post solid gains in the second and third quarters, helped by resilient consumer demand and a surge in business investment linked to artificial intelligence.
Earlier in the year, companies rushed to import goods ahead of new tariffs proposed by the Trump administration, causing imports to surge.
Because imports subtract from GDP calculations, that front-running weighed on headline growth even as domestic demand remained firm.
Despite the late-year slowdown, US growth in 2025 remained the envy of many developed peers, supported by strong household balance sheets and heavy corporate spending on technology.
Inflation refuses to cool
While growth lost steam, inflation showed little sign of easing.
The core personal consumption expenditures price index — the inflation gauge most closely watched by the Federal Reserve — rose 3% in December, matching forecasts but staying well above the central bank’s 2% target.
On a headline basis, the PCE index accelerated to 2.9%, slightly higher than expected.
Both the core and headline measures rose 0.4% on the month, exceeding economists’ projections of a 0.3% increase.
The persistence of inflation has complicated the outlook for monetary policy, even as growth cools.
Trump targets shutdown and Fed
Just ahead of the data release, Donald Trump sought to frame the weak GDP reading as a political failure rather than an economic one.
In a post on Truth Social, Trump said the shutdown had cost the US economy “at least two points in GDP” and warned against future disruptions.
He also renewed his criticism of the Fed and its chair, Jerome Powell, urging lower interest rates.
The Fed cut its benchmark rate by three-quarters of a percentage point in late 2025 but has since adopted a more cautious stance as officials weigh stubborn inflation against risks to the labour market.
Demand remains resilient beneath the surface
While the headline GDP number appeared weak, other indicators pointed to healthier underlying demand.
Final sales to private domestic purchasers — a key measure watched by Fed officials — rose 2.4% in the quarter.
Although that was down from the prior period, it still signalled steady momentum in the $31.5 trillion US economy.
Gross private domestic investment increased 3.8% after being flat in the third quarter, reflecting continued spending by businesses, particularly in technology and automation.
Consumer spending, however, showed signs of fatigue.
Personal consumption expenditures rose 2.4%, down from 3.5% in the previous quarter, while exports fell 0.9% after a strong summer surge.
Outlook for 2026
Economists expect growth to reaccelerate modestly this year as the drag from the shutdown fades.
According to the latest Wall Street Journal survey, the US economy is forecast to expand about 2.2% in 2026, supported by ongoing AI investment, tax incentives from last summer’s fiscal package and a weaker dollar that could aid exporters.
Still, analysts caution that prolonged shutdowns and elevated inflation pose ongoing risks.
“The government shutdown hurt growth at the end of 2025,” said Heather Long, chief economist at Navy Federal Credit Union.
“The economy will likely bounce back in early 2026, but it isn’t harmless to do prolonged shutdowns. Overall, the US economy was resilient in 2025 despite many headwinds. Solid consumption and the AI boom kept the economy growing.”
As policymakers look ahead, the challenge will be balancing a cooling growth outlook with inflation that remains uncomfortably high — a tension that is likely to define economic debates in the months to come.
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