Q4 Growth Plunges to 1.4%, Missing Forecasts (Image Credits: Unsplash)
Washington, D.C. – The U.S. economy posted a 2.2 percent expansion for all of 2025, reflecting underlying strength even as the final quarter brought an abrupt slowdown.[1]
Q4 Growth Plunges to 1.4%, Missing Forecasts
Gross domestic product rose at just a 1.4 percent annualized pace in the fourth quarter of 2025, a sharp drop from the 4.4 percent surge recorded in the third quarter.[1] This figure fell well below economist expectations of around 2.5 percent. The deceleration stemmed largely from a steep decline in government spending tied to a federal shutdown that lasted from October 1 to November 12.
Federal outlays tumbled 16.6 percent during the period, subtracting nearly one percentage point from overall growth.[2] Exports also weakened, while imports pulled back less than anticipated, further weighing on the headline number. Still, private sector demand held firmer, with final sales to private domestic purchasers advancing 2.4 percent.
Consumers Kept the Engine Running
Consumer spending, which accounts for about two-thirds of economic activity, increased at a 2.4 percent annual rate in the fourth quarter, down slightly from 3.5 percent in the prior period.[2] Wealthier households fueled much of this resilience, buoyed by gains in stock and home values. Holiday purchases provided a late boost, though lower- and middle-income families showed caution, with credit card debt climbing to $1.15 trillion by year-end.
Throughout 2025, spending patterns highlighted a divide: affluent consumers splurged on services like health care and travel, while others tapped savings or borrowed more amid softening job growth.[3] Mark Zandi, chief economist at Moody’s Analytics, noted, “The consumer drives the economic train.”[3]
Business Investment Shines with AI Focus
Gross private domestic investment accelerated to a 3.8 percent rise in the fourth quarter, rebounding from flat performance earlier.[2] Heavy spending on artificial intelligence infrastructure, including data centers and related equipment, stood out as a key driver. Tax incentives from last summer’s GOP bill encouraged immediate deductions for such outlays.
- Intellectual property products, like software and R&D, saw strong gains.
- Equipment investment, particularly in information processing, contributed positively.
- Private inventory accumulation supported the overall picture.
- Housing remained a drag, hampered by affordability issues and mortgage rates above 6 percent.
Economists expect this AI momentum to persist into 2026, potentially broadening to other sectors.[3]
Full-Year Strength and Underlying Challenges
The 2.2 percent annual growth marked a step back from 2024’s 2.8 percent pace, according to Bureau of Economic Analysis data, yet it represented the fifth straight year above the long-term average.[1] Solid consumer outlays and business commitments offset weaknesses in areas like residential construction and trade volatility. Tariffs prompted early-year stockpiling, which distorted import figures and pressured GDP calculations.
Job creation cooled to 181,000 additions in 2025, down sharply from prior years, concentrated in health care.[3] Consumer confidence hit multi-year lows in early 2026 amid policy uncertainty.
One-Off Drag or Sign of Trouble Ahead?
Many analysts view the Q4 stumble as temporary, with government spending poised for a rebound and AI investments continuing apace. Forecasts point to around 2.2 percent growth in 2026, aided by tax cuts and a weaker dollar boosting exports.[4]
Key Takeaways:
- Annual GDP grew 2.2 percent, driven by consumers and AI-related business spending.
- Q4’s 1.4 percent rate reflected a government shutdown’s one-time hit.
- Housing weakness and uneven job growth pose ongoing risks.
The 2025 economy proved durable against late hurdles, underscoring the private sector’s vitality. What are your thoughts on this performance and the path forward? Tell us in the comments.