US Economic Growth Slows Sharply in Fourth Quarter of 2025
The United States economy grew at a sluggish 0.5% annual pace in the October–December quarter, according to a revised estimate from the Commerce Department. This figure is lower than the earlier projection of 0.7%, marking a significant deceleration from the robust 4.4% growth recorded in the July–September period and 3.8% in the April–June quarter.
Government Shutdown Weighs Heavily on Federal Spending
A key factor behind the slowdown was the prolonged 43-day government shutdown, which caused federal government spending and investment to contract at a steep 16.6% annual rate. This contraction alone shaved 1.16 percentage points off the overall GDP growth, highlighting the substantial impact of political gridlock on economic activity.
Consumer Spending Shows Notable Decline
Consumer spending, which accounts for a major share of US economic activity, rose by only 1.9% in the fourth quarter. This was lower than previous estimates and represents a sharp drop from the 3.5% growth seen in the second quarter. Spending on goods such as automobiles and clothing grew by a mere 0.3%, compared to a much stronger 3% in the preceding quarter, indicating weakening consumer confidence and demand.
Business Investment Moderates Despite AI Support
Business investment excluding housing grew at a 2.4% pace, likely supported by increased spending on artificial intelligence technologies. However, this growth moderated from the 3.2% pace observed in the previous quarter, suggesting that even innovative sectors are not immune to broader economic headwinds.
Underlying Economic Strength Weakens
A key measure of underlying economic strength—which includes consumer spending and private investment but excludes volatile components like exports, inventories, and government spending—rose at a slower 1.8% pace. This is down from 2.9% in the third quarter, pointing to a fundamental softening in the domestic economy.
Full-Year Growth Trends and Labor Market Signals
For the full year 2025, the US economy expanded by 2.1%, slowing from 2.8% in 2024 and 2.9% in 2023. The labor market has shown mixed signals, with hiring weakening last year to its slowest pace outside a recession since 2002. In early 2026, employers added 160,000 jobs in January, cut 133,000 in February, and added a stronger-than-expected 178,000 jobs in March, reflecting ongoing volatility.
Uncertain Outlook Amid Global Disruptions
The economic outlook remains uncertain amid rising energy prices and global disruptions following the US-Israel conflict with Iran. These external factors add to domestic challenges, creating a complex environment for policymakers and businesses alike.
Thursday’s report from the Commerce Department is the final estimate for fourth-quarter GDP. The first estimate for January–March growth is scheduled to be released on April 30, which will provide further insight into whether the slowdown is persisting or if the economy is beginning to regain momentum.
