U.S. GDP Slows to 1.4% in Q4 2025 as Core PCE Remains Elevated
Q4 slowdown meets sticky inflation
The U.S. economy lost momentum at year-end: fourth-quarter annualized growth registered 1.4%, well below the typical market projection. Analysts and policymakers attributed a meaningful portion of the shortfall to the prolonged federal funding lapse, which sharply reduced government consumption and investment during the period.
Household spending cooled noticeably. Measured consumer outlays rose, but at a slower clip versus earlier quarters, and retail purchases across the country failed to advance in December — a sign that the holiday-period lift flagged late in the season. The pullback reflected households’ recalibration toward essentials amid lingering price pressures and heightened concerns about income and job continuity, reducing the near-term contribution of consumption to GDP.
The consequences rippled through the retail sector: firms that front-loaded promotions saw weaker late-season receipts, complicating inventory management and pricing strategies and raising the prospect of more cautious revenue guidance in coming quarters. That private-sector dynamic, together with the federal drag, meant that private demand showed resilience when isolated from volatile government flows but was not enough to prevent the overall slowdown.
Inflation signals added further friction for policymakers. The Federal Reserve’s preferred inflation gauge, core personal consumption expenditures, stayed around 3.0% year-over-year in December — noticeably above the Fed’s 2% objective — and monthly PCE readings were firmer than consensus forecasts. That combination of sticky inflation and softer consumption creates a tighter policy trade-off for the central bank.
Investment and business activity presented a mixed picture: gross private domestic investment rebounded, signaling continued corporate spending, but total government outlays plunged, producing a steep quarterly decline in government spending. State and local budgets offered only a modest offset by increasing expenditures.
Policymakers face a dual message: demand outside the public sector remains sufficiently robust to support growth in parts of the economy, yet persistent price pressures and late-quarter consumption weakness argue for caution. The Fed trimmed its policy rate substantially late in 2025, but officials have signaled they will weigh sticky PCE readings and recent consumer softness before committing to additional easing.
Market and political reactions were swift. Political leaders blamed the funding impasse for measurable economic harm, while economists warned that episodic fiscal disruptions and weakening retail activity can heighten uncertainty for businesses and households. Financial markets may therefore see a slower easing cycle, and companies exposed to discretionary spending face greater revenue and margin volatility.
On a calendar-year basis, 2025 closed with growth of roughly 2.2%, down from the prior year. Economists expect a mechanical rebound in early 2026 once fiscal flows normalize, but they caution that the strength and composition of the recovery will hinge on household spending patterns, export momentum, and the Fed’s next moves.
- Key quarterly figures: consumption growth slowed to 2.4%; exports fell by 0.9%.
- Government-sector drag: total government spending dropped about 5.1%; federal spending plunged near 16.6%.
- Private demand proxy (final sales to private domestic purchasers) rose around 2.4%, signaling underlying resilience despite retail softness.
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