US growth falls sharply to 1.4% annualised rate in fourth quarter

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The US economy grew at an annualised rate of just 1.4 per cent in the fourth quarter, far below Wall Street expectations, as the record federal shutdown hit government spending.

Friday’s figure from the Bureau of Economic Analysis was sharply down from 4.4 per cent in the previous three-month period and fell well short of expectations of 2.8 per cent in a Bloomberg poll of economists.

It comes after an unprecedented 43-day federal government shutdown in October and November that the BEA said knocked a point off growth. A slowdown in consumer spending also weighed on GDP, offset slightly by an uptick in business investment.

“The disappointing end to the year largely reflected a self-inflicted drag from the longest government shutdown in US history,” EY-Parthenon chief economist Gregory Daco said.

While the hit to government spending is expected to be reversed in the first quarter of 2026, the weak figure will dent some of the optimism over the state of the US economy, which President Donald Trump said was “booming” in remarks to world leaders at the Davos World Economic Forum last month.

The GDP slowdown came alongside an acceleration in price pressures. The personal consumption expenditures index — the Federal Reserve’s preferred measure of inflation — rose to 2.9 per cent in December, its highest level since March 2024.

The figure was up from 2.8 per cent in November, moving further away from the Fed’s target of 2 per cent and making it more difficult for the central bank to cut interest rates this year, economists said.

Fed policymakers warned in their most recent meeting that progress towards their 2 per cent inflation goal “might be slower and more uneven than generally expected”, according to minutes released this week.

Market moves were initially muted in response to the data but became more volatile later in the morning after the US Supreme Court ruled Trump exceeded powers in imposing tariffs on trading partners.

The dollar index and Treasury yields remained slightly higher. The S&P 500 was up 0.1 per cent and the Nasdaq Composite gained 0.3 per cent.

GDP growth forecasts had swung wildly in the run-up to Friday’s data release as economists attempted to interpret a slew of varying indicators of the health of the US economy.

As recently as last month, analysts had expected bumper fourth-quarter growth, driven by robust spending by richer consumers and AI-fuelled business investment. The Atlanta Fed had predicted a GDP growth rate as high as 5.4 per cent.

But expectations had since cooled as more data became available and pointed to decreasing momentum. Figures released on Thursday showed the US trade deficit jumped in December, knocking GDP growth. Still the hit to government spending, which fell 5.1 per cent, was larger than economists had expected.

Trump on Friday sought to pin the slowdown on Democrats and the Fed, which he has criticised for not lowering interest rates more quickly. 

“The Democrat Shutdown cost the U.S.A. at least two points in GDP . . . No Shutdowns! Also, LOWER INTEREST RATES. “Two Late” Powell is the WORST!!!” he posted on his Truth Social network ahead of the release.

Economists expect a bounceback in government spending in the first quarter of this year should offset the weak end to 2025, leaving the economy in a strong position as it enters 2026.

“The core of the economy is resilient,” said Michael Pearce at Oxford Economics. “With tariff pressures fading and tax cuts beginning to fuel an increase in capital spending, the economy will gather momentum in 2026.”

Torsten Sløk, chief economist at Apollo Global Management, said that with inflation ticking up, there was a risk that the economy could overheat. “It is going to be very hard for the Fed to cut interest rates this year,” he said.