The U.S. economy grew at an unexpectedly sluggish 0.7% annual rate from October through December, significantly lower than initial estimates due to the impact of last fall’s 43-day government shutdown, according to a report by the Commerce Department.
Key Takeaways
The U.S. economy grew at an unexpectedly slow rate of 0.7% in the fourth quarter of 2025, significantly lower than initial estimates due to the impact of last fall’s 43-day government shutdown and a sharp decline in consumption growth.
- The Commerce Department reported that GDP growth was half the government's initial estimate of 1.4%, with economists expecting stronger growth.
- Federal government spending and investment plunged at a 16.7% rate, significantly impacting fourth-quarter growth.
- Consumer spending grew at a 2% clip, down from previous estimates and reflecting economic slowdown concerns.
- The war with Iran has driven up oil and gas prices, adding to economic uncertainty and clouding the outlook.
Growth in gross domestic product (GDP) — the nation’s output of goods and services — was down sharply from 4.4% in last year’s third quarter and 3.8% in the second. The fourth-quarter number was half the government’s initial estimate of 1.4%, with economists expecting a revision to show stronger growth.
The shutdown significantly impacted federal government spending and investment, which plunged at a 16.7% rate, hacking off 1.16 percentage points from fourth-quarter growth. For all of 2025, GDP grew by 2.1%, down from an initial estimate of 2.2% and from 2.8% in 2024 and 2.9% in 2023.
The economic slowdown was attributed to a combination of factors, including the government shutdown and a sharp decline in consumption growth. Consumer spending grew at a 2% clip, down from 3.5% in the third quarter and the initial estimate of 2.4%. Business investment, excluding housing, increased by 2.2%, reflecting investments in artificial intelligence but lower than expected.
The U.S. economy has shown resilience despite President Donald Trump’s policies, including sweeping import taxes and mass deportations. However, the war with Iran has driven up oil and gas prices and clouded the economic outlook. The job market is also in a slump, with 92,000 jobs cut last month and fewer than 10,000 jobs added per month in 2025.
The Commerce Department reported that the personal consumption expenditures price index (PCE) rose by 3.1%, slightly below December's increase but still indicating persistently elevated prices even before the Iran war caused spikes in oil and gas costs. The inflation gauge closely monitored by the Federal Reserve moved higher, with core prices rising to their highest level in nearly two years.
The economic data has raised concerns about stagflation as the U.S.-Israeli conflict with Iran continues to disrupt global energy markets. The University of Michigan's sentiment survey showed a decline due to the war, and consumer spending held firm at a 0.4% rate in January from December.
The Federal Reserve is expected to keep its benchmark overnight interest rate unchanged next Wednesday, with financial markets anticipating a single rate reduction this year in September. The central bank will issue its next rate decision on Wednesday, with markets assigning a near 100% probability that the rate-setting Federal Open Market Committee will remain on hold.
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