Growth Check: United States’s Q4 Slows to a Tepid 0.7% — and the Reasons Are Plain

AP, CNBC, CNN, NBC News, the Financial Times, and Market Watch contributed to this report.

The US economy limped across the year’s finish line. The government’s second read on fourth-quarter growth dropped to just 0.7% annualized — a sharp retreat from the 1.4% first estimate and a big miss versus consensus. That move wasn’t some tiny footnote; it rewrites the story of how 2025 ended and sets a grittier starting point for 2026.

Why the downgrade? The headline culprit was the 43-day government shutdown last fall. Federal spending and investment plunged at a 16.7% annual rate, slicing roughly 1.16 percentage points off growth for the quarter. In plain terms: when the government shut down, parts of the economy that depend on federal paychecks and contracts stopped moving — and GDP felt it.

Consumer spending did keep the engine ticking, but slower. Households spent more, yet at a 2% pace — well under the 3.5% pop from the prior quarter and softer than earlier estimates. Business investment (excluding housing) looked resilient-ish at a 2.2% clip — likely money chasing productivity gains and artificial intelligence projects — but even that was revised down from what the Commerce Department initially reported.

Exports were a surprise drag. They fell at a 3.3% annual rate, worse than the first read, and inventories didn’t bail the numbers out. Those hits amplified the shutdown’s punch and left GDP growth much weaker than expected heading into the new year.

For the full year, GDP rose 2.1% — a reasonable number, but a notch below prior readings and the slowest pace since a few years back. The downgrade to the fourth quarter means 2025 ended with less momentum than we thought, just as fresh headwinds — notably surging energy costs from the Middle East conflict — were kicking in.

A couple of policy notes matter here. Inflation hasn’t collapsed; the Fed’s preferred measure, core PCE, showed a 0.4% rise in January and a 3.1% year-over-year increase. That’s above the central bank’s comfort zone and narrows room for rate cuts. Analysts warn the data raises stagflation risks: weaker growth and sticky inflation is a toxic combo for policymakers.

And the labor market is cooling. Employers shed 92,000 payrolls last month, and hiring last year averaged near the weakest outside recession years since 2002. That weak job creation and the GDP slowdown create a policy puzzle: should the Fed look through the softness — or take the inflation signal seriously and hold or even talk about tightening later in the year? Right now markets are betting the Fed will leave rates alone at the next meeting, but those bets could change fast if oil keeps rising and hiring stays weak.

What this means for businesses and households is straightforward but unpleasant. Higher energy costs — already ratcheting up after geopolitical shocks — bite into household budgets and raise input costs for firms. Slower growth makes companies more cautious about hiring and capital spending, which then feeds back into weaker consumer confidence. It’s a loop, not a one-off.

The revision also underlines a practical truth: early GDP estimates are noisy. Revisions happen. But this one is notable because it moved in the wrong direction and because the reason — a lengthy shutdown — is squarely a policy choice. That’s a political as well as an economic story. Lawmakers can, at least in theory, prevent a repeat. Whether they will is another question.

Bottom line: the economy wasn’t as strong when the calendar flipped. The finish to 2025 was softer than first assumed, the jobs picture is cooling, and inflation remains sticky. Policymakers are walking into 2026 with less runway than they thought. If oil and geopolitical risks keep spiking, the path forward looks bumpier — and faster rate cuts look unlikely this year unless something changes dramatically.