Economic growth late last year was much weaker than previously thought
New government economic data shows that U.S. economic growth was significantly weaker in the final three months of 2025 than previously reported.
The nation's gross domestic product — the total value of goods and services produced in the U.S. — expanded at a meager 0.7% annual pace in the fourth quarter, the Commerce Department said Friday. That is half the 1.4% growth rate the agency initially estimated last month.
For all of 2025, GDP grew at a 2.1% pace, representing solid growth, yet down from an initial estimate of 2.2% and slower than the 2.8% growth recorded in 2024.
Shutdown hit
The U.S. government shutdown late last year severely impacted economic growth, with federal spending and investment plunging at a 16.7% rate, the Commerce Department figures show. That hacked 1.16 percentage points off fourth-quarter growth.
Inflation data, also released on Friday, indicates that consumer prices crept higher in January, a sign that costs continued to rise even before the Iran war drove up energy prices. Together, the two reports suggest the economy may not be as resilient to headwinds — including tariffs that have pushed up prices on some goods — as previously thought, economists said.
The new data "means things could be more fragile right now than we know. Keep in mind, this is January data, and a lot has happened in the past several weeks," said Elizabeth Renter, senior economist at NerdWallet, in an email. "A weaker jobs report for February and inflation that remained above target before the war in Iran began all set the stage for potential fragility."
Flaring inflation
Prices rose at a 2.8% annual rate in January compared with a year earlier, the Commerce Department said Friday in its personal consumption expenditures (PCE) report. That's slightly below December's increase, in a report that was delayed by last fall's six-week government shutdown.
Excluding volatile food and energy categories, core prices rose at a 3.1% pace, up from 3% in the prior month and the highest in nearly two years.
"The latest personal consumption expenditures inflation data tells us that the inflation picture wasn't looking good even before the Middle East crisis," Sonu Varghese, chief macro strategist at Carson Group, said in an email.
Inflation "is only going to head higher as the energy shock comes through," Varghese added.
Fed conundrum
The Federal Reserve is widely expected to keep its benchmark interest rate unchanged when officials meet next week, given the sharp rise in oil prices due to the Iran war.
The PCE data also showed that consumer spending was relatively flat in January after adjusting for inflation, while spending on goods decreased.
"For the Federal Reserve, this is the worst of both worlds: stubborn inflation that argues against cutting rates, paired with potentially fragile demand that is flashing early warning signs," Olu Sonola, head of U.S. economics at Fitch Ratings. "The Fed can shrug off pockets of weakening growth, but resurgent inflation severely limits its room to maneuver, leaving policy potentially stranded for months."
