The US economy experienced a deceleration in growth during the concluding months of 2025, as the unprecedented government shutdown exerted pressure on economic activity, culminating in a year marked by the most subdued growth since the pandemic. Nevertheless, it was considerably better than the dire outcomes anticipated by analysts when President Donald Trump announced his extensive tariffs last spring. The economy experienced growth in 2025, even in the face of tariffs, a stringent immigration crackdown, and one of the most sluggish periods of job creation since the Great Recession, primarily driven by affluent consumers who maintained their spending habits. The Commerce Department reported on Friday that the annualized rate of gross domestic product, which quantifies the total output of goods and services within the economy, stood at 1.4% for the period from October to December. This represents a significant deceleration from the 4.4% rate observed in the third quarter, and falls short of the 1.9% rate anticipated by economists in a survey conducted by data firm FactSet. GDP is modified to account for seasonal fluctuations and inflationary pressures.
The economy experienced a growth rate of 2.2% in 2025, marking the slowest expansion since 2020. Stephanie Roth stated that the slower growth observed last year, in comparison to previous years, was “great given how much labor supply is down.” She remarked “One might refer to it as ‘Goldilocks.’” The reductions in federal expenditure, resulting from the shutdown, detracted 1.1 percentage points from growth in the previous quarter, as indicated by the report, with analysts broadly anticipating that a significant portion of these losses will be recovered in the early part of this year. The slight reduction in consumer spending on goods has adversely impacted fourth-quarter GDP. The reading for the fourth quarter experienced a delay of one month due to the government shutdown that occurred last year. Consumer spending, a critical component of the US economy, decelerated in the fourth quarter to an annual rate of 1.4%, marking the slowest growth since early 2025. Over the past year, spending has exhibited disparities across income brackets, as the lowest-income Americans grapple with the pressures of escalating debt, a decelerating labor market, and the cumulative effects of inflation experienced over recent years. “A slower pace of consumer spending was expected for the final quarter of 2025, as some Americans had just shelled out for a new car before electric vehicle tax credits expired,” stated Brett Ryan.
However, Ryan anticipates that the primary economic driver will regain momentum in the early part of this year, primarily due to tax refunds, asserting that there is “certainly nothing that would get you too concerned about an imminent consumer slowdown.” The increasing disparity in wealth within America has led households with limited resources to develop a more negative outlook on the economy over the past year. In a separate report on Friday, the University of Michigan indicated that consumer sentiment persisted in its divergence between individuals possessing college degrees and stock investments, and those lacking such qualifications. “A sizable month-to-month increase in sentiment for the largest stockholders was fully offset by a decline among consumers without stock holdings,” stated Joanne Hsu, the survey’s director, in a release. “Similar divergences were observed across income and education, with higher-income or college-educated consumers displaying increases in sentiment, whereas their lower-income or less-educated counterparts did not.” In the fourth quarter, business spending increased to 3.7%, up from 3.2% in the preceding three-month period. Ryan remarked that “AI spending is still definitely doing a lot of heavy lifting” on the business investment side. A separate Commerce Department report released Friday showed that consumer spending remained in the black during December; however, the supports propping up those purchases grew weaker; and inflation heated up to its highest rate in nearly two years. Consumer spending rose by 0.4% in December, but when factoring in inflation, that pace was just 0.1% from November, according to the shutdown-delayed report originally scheduled for January 29.
Personal incomes increased by 0.3% for the month, partly driven by a significant settlement awarded to victims of the Maui wildfires. Considering the impact of inflation, personal income growth remained stagnant. The proportion of savings relative to after-tax income has decreased to 3.6%, marking its lowest level since October 2022. Meanwhile, the Federal Reserve’s preferred inflation gauge increased to 2.9%, moving further away from the central bank’s 2% target. The annual rate has reached its peak since March 2024. According to data from the Commerce Department, the 0.4% monthly inflation increase was primarily influenced by rising prices for goods. The imposition of significant tariffs on imported goods by Trump has led to increased prices for specific items, including furniture, appliances, and toys. Excluding the fluctuations in energy and food prices, a key indicator of the underlying inflation trend increased to its highest level in almost a year. The core PCE price index increased by 0.4%, resulting in an annual rate of 3%.