Economic growth slowed more than expected at the end of last year — and a shutdown-fueled drop in government spending was a major culprit.
US real gross domestic product rose at an annualized rate of 1.4% in the fourth quarter, short of the 2.8% expected.
That’s also subpar compared to the 4.4% growth in the third quarter, which was propped up by robust consumer spending and exports. Still, it means the economy wrapped up the year with some strength in a year filled with uncertainty and many policy changes.
Economic growth likely would have looked better without the record-long government shutdown in the fall.
“On paper, 1.4% looks weak,” Mark Hamrick, senior economic analyst at Bankrate, said. “If you strip away the shutdown drag which shaved roughly 1 to 1.5 percentage points off the top line, we are looking at an economy that would have otherwise hummed along near its full year average of 2.2%.”
“The contributors to the increase in real GDP in the fourth quarter were increases in consumer spending and investment,” the Bureau of Economic Analysis said. “These movements were partly offset by decreases in government spending and exports.”
Consumer spending slowed to 2.4% in the fourth quarter from 3.5% in the third quarter. Meanwhile, fixed investment was stronger than in the previous quarter, rising 2.6% in the fourth quarter compared to 0.8% in the third. Federal spending fell 16.6% in the fourth quarter after rising 2.7% in the third, likely due to the government shutdown in October and November.
That big drop in government spending and investment dragged overall GDP growth down:
Overall, real GDP rose 2.2% last year, short of the 2.8% a year prior. BEA said the increase in 2025 was mainly due to consumer spending and investment.
“We expect a strong year of economic growth in 2026, driven by business investment, consumer spending and fading trade headwinds,” said Rick Gardner, chief investment officer of RGA Investments.
Other recent data releases showed how the economy ended 2025 and began 2026. The job market has been losing strength over the past few years, and in 2025, it added the fewest jobs in over two decades outside recessions. However, the job market had a good start to 2026, with unemployment cooling and more jobs added than expected.
Meanwhile, inflation has gotten closer to the Fed’s 2% target. The consumer price index, one inflation measure, rose 2.4% year over year in January, softer than the previous 2.7%. Advance estimates of retail and food services sales showed sales were pretty flat in December from November’s sales, but better than a year ago.
