U.S. GDP Growth Slows to 1.4% in Fourth Quarter
U.S. economic growth slowed sharply in the fourth quarter, as a prolonged federal government shutdown and a wider trade deficit weighed on activity. The slowdown offset a surge in capital spending driven by artificial intelligence investments.
According to the U.S. Bureau of Economic Analysis (BEA), real gross domestic product (GDP) expanded at an annualized rate of 1.4% between October and December. Economists had expected growth of 2.8%, following a robust 4.4% expansion in the third quarter.
Government Shutdown Dragged on Economic Activity
The BEA noted that a lapse in federal funding led to temporary agency closures and furloughs of government workers. Although the exact impact cannot be fully isolated, the agency estimated that reduced federal services subtracted roughly one percentage point from fourth-quarter GDP growth.
Paul Ashworth, Chief North America Economist at Capital Economics, said the shutdown had a larger negative effect on the economy than earlier Treasury data suggested. However, he expects the economic drag to reverse in the first quarter of 2026.
Trade Deficit and Imports Weigh on Growth
A sharp increase in the U.S. trade deficit in December also contributed to slower growth. The widening gap was partly driven by a decline in gold exports and a rise in imports, including foreign digital equipment purchases.
Despite broad U.S. tariffs under President Donald Trump, imports rose in December. However, for the full fourth quarter, total imports declined — which typically supports GDP, as imports subtract from overall growth calculations.
Consumer Spending and AI Investment Offer Support
Consumer spending continued to provide support, particularly in the healthcare sector. Hiring within healthcare remained strong and contributed significantly to overall labor market stability in January.
Still, real consumer spending growth slowed to 2.2% year-on-year in the fourth quarter, compared to 3.4% a year earlier. Analysts at Morgan Stanley said the data highlights a gradual cooling in domestic demand, which had previously been masked by swings in inventories and trade flows.
At the same time, increased spending on research and development helped anchor growth. The rise reflects continued investment in AI infrastructure, including data centers and advanced technology projects.
For the full year 2025, real GDP increased by 2.2%, below the 2.8% growth recorded in 2024.
Inflation Data Adds Pressure
Inflation data released alongside the GDP report showed renewed price pressures.
The core Personal Consumption Expenditures (PCE) price index — the Federal Reserve’s preferred inflation gauge — rose 0.4% month-on-month in December, accelerating from 0.2% in November and exceeding expectations of 0.3%.
On an annual basis, core PCE increased 3.0%, above forecasts of 2.9% and higher than the previous 2.8% reading. The headline PCE index climbed 0.4% monthly and 2.9% year-on-year.
Morgan Stanley analysts noted that tariff-related price increases continued to filter through to goods prices. Meanwhile, analysts at Vital Knowledge suggested that while markets may attribute the GDP miss largely to the government shutdown, the stronger PCE inflation data could reinforce concerns following recent hawkish Federal Reserve commentary.
