Quarterly Growth Rate Drops Sharply The Commerce Department’s advance estimate shows U.S. GDP grew at an annualized 1.4% in the fourth quarter of 2025, a steep decline from the 4.4% pace recorded in July‑September [1][2][3]. Annual growth for the full 2025 calendar year was 2.2%, the weakest expansion since 2020 [2][3]. Economists had forecast a 1.9% rise, leaving the actual figure well below expectations [2]. The slowdown marks the smallest quarterly gain since the pandemic’s onset [1].

Federal Shutdown Removes Major Growth Point A six‑week federal shutdown slashed government outlays by roughly 16‑17%, directly shaving about one percentage point from Q4 GDP [1][3]. The Commerce Department attributes a 1.1‑point reduction to the shutdown, while former President Donald Trump claimed the impact could be as high as two points [3]. The loss of federal spending was the largest single drag on activity in the quarter [1]. Officials note the shutdown’s effect dwarfs other fiscal pressures such as new tariffs and tighter immigration rules [3].

Consumer Spending Remains Positive Yet Weaker Household expenditures rose 2.4% year‑over‑year in Q4, but the consumer‑spending contribution to GDP fell to a 1.4% annualized rate, the lowest since early 2025 [2][3]. Personal income increased modestly by 0.3% in December, while the personal saving rate dropped to 3.6%, its lowest level since 2008 (or October 2022 per CNN) [1][2]. The decline reflects tighter household finances and greater reliance on debt [1]. Sentiment surveys show divergent trends, with optimism among college‑educated and stock‑holding families but pessimism among lower‑income households [2].

Business Investment Focused on AI and IT Corporate spending was modest overall, with most of the gain coming from AI‑related equipment, data centers, and other intellectual‑property and IT purchases [1][3]. Investment outside these sectors remained limited, prompting analysts to describe the economy as “one‑legged” and heavily weighted toward technology projects [1]. The narrow investment base raises concerns about the sustainability of growth once AI spending plateaus [1]. Private‑sector investment helped offset some of the shutdown‑induced contraction [3].

Inflation Pressures Keep Fed Rates Steady The personal consumption expenditures (PCE) price index rose to 2.9% year‑over‑year in December, with the core PCE climbing to a 3% annual rate, the highest since March 2024 [2][3]. Higher tariffs on imports such as furniture and appliances contributed to the price increase [2]. The inflation uptick dampened expectations for near‑term Federal Reserve rate cuts, suggesting policymakers will likely maintain the current stance [1]. Persistent price pressures add to the uncertainty surrounding the economic outlook [3].