The U.S. economy grew at an annual rate of just 1.4% in the fourth quarter, significantly lower than experts expected. This growth rate is a sharp decline from the previous quarter’s 4.4% and well below the anticipated 2.8%.
The slowdown can be attributed largely to a federal government shutdown that affected spending. While personal spending also took a hit, businesses did increase their investments somewhat. Paul Ashworth, an economist at Capital Economics, pointed out that the shutdown had a more substantial impact on growth than earlier data suggested. However, he anticipates a rebound in the economy for the first quarter of 2026.
Inflation also saw a slight uptick, with the personal consumption expenditures index rising to 2.9% by December, the highest since March 2024. This is concerning as it surpasses the Federal Reserve’s target of 2%.
Before the data release, there were varied predictions about the economy’s performance. Some analysts even projected a growth rate as high as 5.4%, primarily due to robust consumer spending and AI-driven business investment. But as more data came in, expectations adjusted downwards.
A recent report showed the U.S. trade deficit increased in December, which further dampened GDP growth. Former President Donald Trump attributed the slowdown to Democrats and criticized the Federal Reserve for not lowering interest rates more swiftly.
Interestingly, the Bureau of Economic Analysis noted that the shutdown knocked about 1 percentage point off the fourth-quarter growth. Torsten Sløk, chief economist at Apollo Global Management, emphasized this point, saying that 2.4% growth would still be respectable without the shutdown’s impact. He added that rising inflation could pose challenges for the Federal Reserve, making it tough to consider interest rate cuts this year.
Overall, the market reacted modestly to this data. The dollar index slightly increased, and Treasury yields were stable. Futures for the S&P 500 dipped by 0.3%.
In light of these developments, experts are vigilant. A managing director at a financial firm recently stated that if inflation continues to rise, it might put more pressure on the Fed to take action, potentially leading to tighter monetary policies. This interaction between government spending, consumer behavior, and interest rates will be crucial to watch in the coming months.
Staying informed will be essential as these economic trends evolve. For more on the state of the economy, check sources like the Bureau of Economic Analysis for updated statistics and reports.
