US GDP cools to 1.4%, well below forecasts; Fed rate cuts back in focus

Commerce Department data show US GDP grew 1.4% annualised in late 2025, undershooting estimates and potentially influencing the Federal Reserve’s rate path.

The US economy lost momentum near the end of 2025, with growth slowing more than expected as a record-length government shutdown hit spending and investment, even as inflation stayed stubbornly above the Federal Reserve’s target.

Gross domestic product rose at an annualised rate of 1.4 percent in the fourth quarter, according to Commerce Department data released Friday. Economists surveyed by Dow Jones had expected a 2.5 percent gain.

For the full year, the economy expanded 2.2 percent, down from 2.8 percent in 2024.

The Commerce Department estimated that the shutdown subtracted about one percentage point from growth, though it said the exact effects “cannot be quantified.”

Government spending and investment fell 5.1 percent in the quarter, driven by a sharp 16.6 percent drop at the federal level. That decline was only partly offset by a 2.4 percent increase in state and local spending.

Consumer spending, the backbone of the US economy, rose 2.4 percent in the quarter, slower than the 3.5 percent pace in the third quarter. Exports declined 0.9 percent after surging 9.6 percent in Q3, further contributing to the slowdown.

However, underlying demand indicators were firmer than the headline figure suggested. Final sales to private domestic purchasers, a key measure watched by the Fed, increased 2.4 percent, signalling steady private-sector demand in the $31.5 trillion economy. Gross private domestic investment rose 3.8 percent after being flat in the prior quarter.

Alongside the growth data, inflation remained elevated. The core personal consumption expenditures (PCE) price index, the Fed’s preferred inflation gauge, which excludes food and energy, rose 3 percent in December from a year earlier, matching forecasts but staying well above the central bank’s 2 percent target.

On a headline basis, the PCE index climbed 2.9 percent, slightly above expectations. Both core and headline measures rose 0.4 percent for the month, compared to forecasts of 0.3 percent.

Just ahead of the data release, President Donald Trump warned the GDP reading would be weak, attributing it to the government shutdown that ended in November.

“The Democrat Shutdown cost the U.S.A. at least two points in GDP. That’s why they are doing it, in mini form, again. No Shutdowns! Also, LOWER INTEREST RATES. ‘Two Late’ Powell is the WORST!!!” Trump wrote on Truth Social, referring to Federal Reserve Chair Jerome Powell.