The US economy lost momentum in the final months of 2025. Slower consumer spending and a federal government shutdown dragged down growth at year end.
According to the US Commerce Department, the economy expanded at an annual rate of 1.4% in the fourth quarter. That marked a sharp drop from the strong 4.4% growth recorded in the previous quarter.
Even with the slowdown, the economy grew 2.2% for the full year. Many analysts had expected weaker results because of trade tensions, spending cuts, tighter immigration rules, and stubborn inflation.
Trade Policy Swings Shaped the Year
Trade policy shifts played a major role in the year’s uneven performance. Early in the year, companies rushed to import goods before new tariffs took effect. That surge in imports reduced GDP growth because imports subtract from overall output calculations.
As imports slowed in the spring and summer, growth rebounded. However, imports picked up again toward the end of the year, which added fresh pressure on GDP figures.
New trade data showed the US trade deficit widened in December. That report led several economists to lower their growth forecasts before the official GDP release.
Consumer Spending and Investment Trends
Consumer spending, a key driver of the US economy, increased by 2.4% in the fourth quarter. That figure was lower than the 3.5% rise seen in the previous quarter. The slowdown in household spending added to the weaker headline growth number.
Private investment improved, but most gains came from intellectual property and IT equipment. Broader business investment remained limited.
Government spending fell sharply, dropping more than 16% during the quarter. The federal shutdown significantly reduced public sector activity and weighed heavily on economic output.
The Commerce Department estimated that the shutdown alone cut one percentage point from fourth quarter GDP. Officials noted that the total impact could be even larger.
Inflation Adds Pressure on the Federal Reserve
Inflation also showed signs of firming. The Personal Consumption Expenditures price index, the Federal Reserve’s preferred measure, rose to 2.9% in December from 2.8% in November.
This uptick may influence decisions by the Federal Reserve. While many investors expect interest rate cuts this year, stronger inflation could delay that move.
Some analysts believe the latest inflation data sends a clear signal that policymakers may wait before easing monetary policy.
Outlook for 2026
Despite the late year slowdown, several economists describe the core economy as stable. They expect growth to strengthen again as government spending resumes and trade disruptions ease.
Still, inflation trends and policy uncertainty remain key risks. The performance of consumer spending and global trade will likely shape the direction of the US economy in 2026.
