Economic growth late last year was much weaker than previously thought
The latest government economic data reveals that the U.S. economy experienced weaker growth in the final quarter of 2025 than previously thought. According to the Commerce Department, the gross domestic product (GDP) expanded at a modest 0.7% annual pace in the fourth quarter, which is half of the initial estimate of 1.4% growth. This slower growth trend continued throughout 2025, with the GDP growing at a 2.1% pace for the entire year, down from the initial estimate of 2.2% and slower than the 2.8% growth seen in 2024.
The government shutdown towards the end of last year had a significant impact on economic growth, particularly with federal spending and investment plummeting at a rate of 16.7%. This decline shaved off 1.16 percentage points from the fourth-quarter growth figures. In addition, inflation data released concurrently suggests that consumer prices inched higher in January, indicating a continued rise in costs even before the recent spike in energy prices due to the Iran conflict. These reports collectively indicate that the economy may not be as resilient to external pressures, such as tariffs and geopolitical tensions, as previously assumed.
The new data underscores potential fragility in the economy, especially in light of recent events. Elizabeth Renter, a senior economist at NerdWallet, pointed out that a weaker jobs report for February and persistent inflation above target levels before the Iran conflict could further exacerbate this fragility. In January, consumer prices rose at a 2.8% annual rate, slightly lower than the previous month, with core prices (excluding food and energy) increasing at a 3.1% pace, the highest in nearly two years.
Sonu Varghese, chief macro strategist at Carson Group, highlighted that inflation was already a concern prior to the Middle East crisis, and the energy shock could drive prices even higher. The Federal Reserve is expected to maintain its benchmark interest rate unchanged in light of rising oil prices due to the conflict. The PCE data also revealed that consumer spending was stagnant in January after adjusting for inflation, with spending on goods declining.
Olu Sonola, head of U.S. economics at Fitch Ratings, noted the Fed’s dilemma of grappling with stubborn inflation that discourages rate cuts, while also facing signs of potentially weakening demand. This scenario limits the Fed’s flexibility in adjusting monetary policy, leaving them in a challenging position for the foreseeable future. As the economic landscape evolves, it is crucial for policymakers to navigate these complexities effectively to ensure stability and growth in the U.S. economy.
This article was edited by Alain Sherter and contributed to by The Associated Press.
