US Economy Slows: GDP Growth Below Expectations for 2025 & 2026

The U.S. Economy slowed sharply at the end of 2025, with gross domestic product rising at an annualized rate of just 1.4 percent in the fourth quarter, according to data released Friday by the Commerce Department. The figure significantly undershot expectations of a 2.5 percent gain and raises questions about the economic outlook for 2026.

The deceleration follows a robust 4.4 percent annualized growth rate in the third quarter. Analysts had anticipated a slowdown, but the extent of the deceleration was larger than forecast. The primary drag on growth stemmed from the October and November federal government shutdown, which the Commerce Department estimates reduced economic growth by approximately one percentage point. However, the slowdown was not solely attributable to the shutdown, with moderation in consumer spending and exports also contributing factors.

For the full year 2025, the U.S. Economy grew at a pace of 2.2 percent, down from 2.8 percent in 2024. This marks a clear deceleration in economic activity, prompting concerns about the sustainability of growth.

Alongside the disappointing GDP figures, inflation remained stubbornly elevated. A key inflation gauge closely watched by Federal Reserve officials rose 3 percent year-over-year in December. This persistent inflationary pressure complicates the task for the Federal Reserve as it navigates monetary policy.

The slowdown in government spending was particularly acute, reflecting the impact of the shutdown. Consumer spending also increased at a slower pace during the quarter. However, investment showed some resilience, potentially driven by significant corporate investment in artificial intelligence. The Bureau of Economic Analysis noted that the acceleration in investment partially offset the declines in government spending and exports.

The substantial investments being made by technology companies in artificial intelligence are seen by some as a potential catalyst for future growth. Companies are deploying record amounts of capital to build the infrastructure necessary to support the development and deployment of AI technologies. Whether this investment will be sufficient to offset the headwinds facing the broader economy remains to be seen.

Economic forecasts suggest a modest improvement in growth for 2026. Morgan Stanley forecasts real U.S. GDP growth of 1.8 percent for 2026, following an expected 1.6 percent growth rate for 2025. The Congressional Budget Office (CBO) anticipates a slowdown in employment growth in 2025, followed by an increase in 2026, before declining again in 2027 and 2028 as the impact of recent legislation fades.

The economic data has already drawn a political response. Former President Donald Trump attributed the weaker-than-expected GDP figures to the Democratic Party and the Federal Reserve. He specifically blamed the shutdown, which ended in November, and called for lower interest rates.

Chris Rupkey, chief economist at Fwdbonds, suggested the slowdown was a temporary setback. “The Federal government shutdown clearly sent the economy careening off its strong growth path in the fourth quarter which is a one-off that won’t be repeated in early 2026,” he said. However, the data underscores the fragility of the economic recovery and the potential for further disruptions.

The combination of slowing growth and persistent inflation presents a challenging environment for policymakers. The Federal Reserve will need to carefully balance the risks of tightening monetary policy too aggressively, which could further stifle economic growth, and allowing inflation to remain elevated, which could erode consumer purchasing power. The near-term economic outlook remains uncertain, with downside risks stemming from geopolitical tensions, supply chain disruptions, and the potential for further policy missteps.