The US economy experienced a disappointing growth rate of just 1.4 percent in the fourth quarter, significantly underperforming relative to Wall Street’s expectations. This figure, released by the Bureau of Economic Analysis, starkly contrasts with a more robust 4.4 percent growth recorded in the prior quarter and falls short of the anticipated 2.8 percent reflected in a recent Bloomberg poll of economists.
This sluggish growth correlates closely with the historically prolonged federal government shutdown that lasted 43 days in October and November, which the BEA attributed as a major factor in the slowdown, subtracting an entire percentage point from GDP. Additionally, a downturn in consumer spending contributed to the lower growth figures, although business investments showed a slight upward trend.
Gregory Daco, chief economist at EY-Parthenon, highlighted that the disappointing close to the year was largely due to the “self-inflicted drag” from the longest government shutdown in US history. Although expectations for government spending to rebound in the first quarter of 2026 remain optimistic, this downturn could dampen previous forecasts regarding the overall health of the economy. President Donald Trump recently described the economy as “booming” during remarks to global leaders at the Davos World Economic Forum, a statement that now faces scrutiny.
Simultaneously, the economy saw a rise in price pressures, with the personal consumption expenditures index—the Federal Reserve’s preferred inflation metric—climbing to 2.9 percent in December, marking its highest level since March 2024. This uptick from 2.8 percent in November further distances the index from the Fed’s targeted inflation rate of 2 percent, complicating the central bank’s ability to lower interest rates in the near future. According to the most recent meeting minutes, Fed policymakers noted that progress towards the two percent inflation goal may indeed be “slower and more uneven than generally expected.”
On the financial markets, initial reactions to the economic data were muted, though volatility increased after the US Supreme Court ruled that Trump overstepped his authority in imposing tariffs on trading partners. The dollar index and Treasury yields showed slight increases, with the S&P 500 rising by 0.1 percent and the Nasdaq Composite gaining 0.3 percent.
Forecasts for GDP growth had fluctuated significantly leading up to this release, as economists weighed a range of indicators concerning the economy’s health. Just weeks earlier, many analysts had projected strong growth for the fourth quarter based on expected robust expenditure from wealthier consumers and AI-driven business investments. The Atlanta Fed had even anticipated growth as high as 5.4 percent. However, as new data emerged, economists began to temper their forecasts, particularly following Thursday’s report indicating a spike in the US trade deficit in December, which also negatively impacted GDP.
In an attempt to assign blame for the economic slowdown, Trump attributed the sluggish growth to both Democrats and the Fed, criticizing their pace in lowering interest rates. He stated on his Truth Social platform that “The Democrat Shutdown cost the U.S.A. at least two points in GDP… No Shutdowns! Also, LOWER INTEREST RATES. ‘Two Late’ Powell is the WORST!!!”
Looking ahead, economists predict a bounceback in government spending during the first quarter of the year, which could counterbalance the weakened performance at the end of 2025, placing the economy in a strong position for 2026. “The core of the economy is resilient,” noted Michael Pearce from Oxford Economics, suggesting that as tariff pressures diminish and tax cuts stimulate capital spending, the economy is expected to gain momentum in the coming year. However, Torsten Sløk, chief economist at Apollo Global Management, cautioned that with rising inflation, there remains a risk of overheating, making it challenging for the Fed to cut interest rates this year.
