U.S. economic growth eased to an annualized 1.4% pace in the fourth quarter
U.S. economic growth lost momentum in the fourth quarter, weighed down by a prolonged federal government shutdown and a wider trade deficit that offset an AI-driven surge in capital spending. According to an advance estimate from the U.S. Bureau of Economic Analysis, real GDP expanded at an annualized 1.4% pace in the October–December period, well below economists’ expectations of 2.8% and down sharply from the 4.4% growth recorded in Q3.
The BEA noted that a lapse in government funding led to temporary agency closures and worker furloughs. While the full impact cannot be precisely isolated, the agency estimated that reduced federal services shaved about one percentage point off Q4 growth. Capital Economics Chief North America Economist Paul Ashworth said the shutdown proved a larger drag than earlier data suggested, though he expects the impact to reverse in the first quarter of 2026.
Analysts also pointed to a December widening in the U.S. trade deficit—partly driven by weaker gold exports—as another factor behind the slowdown. Imports rose late in the quarter, supported by purchases of foreign digital equipment despite broad tariffs imposed under President Donald Trump, though imports declined overall across the quarter, limiting their drag on GDP.
On an annual basis, real GDP rose 2.2% in 2025, slowing from 2.8% growth in 2024.
Inflation data showed firmer pressures. Core personal consumption expenditures (PCE) prices rose 0.4% month-on-month in December, accelerating from 0.2% in November and exceeding forecasts of 0.3%. Analysts at Morgan Stanley cited ongoing tariff pass-through into goods prices. Year-on-year, core PCE inflation—one of the Federal Reserve’s preferred measures—climbed to 3.0%, up from 2.8% previously and above expectations of 2.9%. Headline PCE inflation increased 0.4% on the month and 2.9% from a year earlier.
