U.S. Q4 GDP Growth Disappoints, Rising Only 1.4%

• The government shutdown from October 1 to November 12 reduced GDP growth by about 1 percentage point, with federal spending plunging 16.6% during the quarter
• Consumer spending slowed to 2.4% growth from 3.5% in Q3, while exports declined 0.9% after surging 9.6% the previous quarter
• Core PCE inflation rose to 3% in December, up 0.2 percentage points from November, keeping price pressures well above the Fed's 2% target and suggesting continued caution on rate cuts

U.S. Q4 GDP Growth Disappoints at 1.4%; Inflation Remains Elevated

Key Economic Data:

The U.S. economy expanded at just 1.4% annualized rate in Q4 2025, significantly missing the Dow Jones estimate of 2.5%. Full-year 2025 GDP growth came in at 2.2%, down from 2.8% in 2024. The Commerce Department attributed approximately 1 percentage point of the slowdown to the government shutdown that lasted from October 1 to November 12.

Inflation Concerns:

Core PCE (Personal Consumption Expenditures), the Federal Reserve's preferred inflation gauge, rose 3% year-over-year in December—well above the Fed's 2% target and up 0.2 percentage points from November. Headline PCE increased 2.9%. Monthly price pressures remained broad-based, with goods prices up 0.4% and services up 0.3%.

Growth Drivers and Headwinds:

Consumer spending, which drives most economic activity, slowed to 2.4% growth from 3.5% in Q3. Government spending plummeted 5.1%, with federal spending tumbling 16.6%. Exports fell 0.9% after a 9.6% surge in Q3. However, gross private domestic investment rose 3.8%, and final sales to private domestic purchasers—a key Fed metric—increased 2.4%, indicating solid underlying demand in the $31.5 trillion economy.

Market Implications:

President Trump criticized both the "Democrat Shutdown" and Fed Chair Jerome Powell, calling for lower interest rates. The Fed, which cut rates by 75 basis points in late 2025, has signaled caution given persistent inflation. Economists expect growth to rebound in early 2026 as shutdown effects dissipate, though elevated inflation may limit the Fed's ability to ease monetary policy further.