US Economy Cools Sharply in 4th Quarter as Government Shutdown Weighs on GDP

The record-breaking government shutdown weighed on the U.S. economy in the fourth quarter as momentum faded following back-to-back quarters of solid gross domestic product (GDP) growth.

Fourth-quarter GDP grew 1.4 percent, driven by consumer spending and investments, according to new data released by the Bureau of Economic Analysis on Feb. 20.

This is substantially down from the 4.4 percent reading in the July–September period and the 3.8 percent expansion in the second quarter.

Economists had penciled in a consensus forecast of 3 percent.

Consumer spending rose 2.4 percent, down from the 3.5 percent surge in the third quarter.

Gross private domestic investment climbed 3.8 percent following a flat reading in the previous quarter and the 13.8 percent decline in the April–June span.

Net exports trimmed the GDP growth rate, sliding 0.9 percent as shipments of goods fell by 1.8 percent. Imports also slipped 1.3 percent, led by a 2.8 percent drop in goods.

Last year’s trade deficit dipped to $901 billion—the third largest in U.S. history—skewed by companies frontrunning the administration’s tariffs and accelerating purchases of foreign goods.

Government consumption expenditures fell sharply, declining 5.1 percent. All of the decline was concentrated at the federal level, with a 16.9 percent drop, due to the spending impasse.

“Some estimates have put the number closer to 2.4% if the government hadn’t been shut down, but it’s always hard to know how accurate those adjustments are,” Chris Zaccarelli, CIO for Northlight Asset Management, said in a note emailed to The Epoch Times.

Economists had warned that the economy would be adversely affected by the federal government closing its doors. But these fears had dissipated as projections indicated impressive fourth-quarter growth.

In the weeks leading up to the GDP report, the Atlanta Federal Reserve expected growth of up to 5.4 percent. However, as more data trickled in, the regional central bank trimmed its estimate to as low as 3 percent.

The downward revision was largely due to slowing consumer spending, underscoring a broad-based pullback in consumption.

December’s retail sales control group—a measure used to calculate GDP—fell by 0.1 percent, reversing the 0.2 percent gain in November, “an unwelcome stumble for consumers that started the holiday season at a solid pace,” Scott Anderson, chief U.S. economist at BMO, said in a note emailed to The Epoch Times.

“Slower real disposable personal income growth, a softening labor market, and declining saving rates finally appear to have diminished the U.S. consumers’ willingness and ability to spend, at least temporarily,” Anderson said.

On the inflation front, the GDP price index—a measure of the prices of goods and services produced domestically—rose at a higher-than-expected pace of 3.7 percent.

Market Reaction

U.S. stocks were still in the red following the latest GDP figures.

Yields on U.S. Treasury securities were mixed. The benchmark 10-year yield was little changed at 4.07 percent.

The U.S. dollar index—a gauge of the greenback against a weighted basket of currencies—ticked up after the economic data. The index is poised for a weekly gain of more than 1 percent.

The disappointing GDP data could complicate the Federal Reserve’s interest-rate path. But the futures market suggests investors are still betting on a June rate cut.

The Year Ahead

Economic observers are largely optimistic about the year ahead, pointing to a broad array of headwinds that should support growth in 2026.

Minutes from the January Federal Reserve policy meeting suggest that policymakers anticipate real GDP to be solid. Robust consumer spending, substantial investments in artificial intelligence, and wealth effects from a strong stock market should be enough to keep growth steady.

Above-trend growth should be solid, driven by productivity gains and looser financial conditions.

The U.S. central bank is not the only one predicting strong growth.

Goldman Sachs economists forecast U.S. GDP growth of 2.5 percent this year, above the consensus estimate of 2.1 percent.

Fiscal stimulus from the One Big Beautiful Bill Act and fading effects from President Donald Trump’s tariffs should be enough to boost growth prospects, the Wall Street institution stated.

“Our strongest conviction views for 2026 are our above-consensus GDP growth forecast and our below-consensus inflation forecast,” David Mericle, chief US economist, said last month in the bank’s report.

“The outlook for the labor market is more uncertain—we expect it to stabilize but see the possibility of further softening as the key risk for 2026.”

The U.S. labor market was off to a strong start, posting 130,000 new jobs in January. The unemployment rate also dipped to a lower-than-expected 4.4 percent from 4.5 percent.

Looking ahead to first-quarter forecasts, the New York Fed Staff Nowcast projects a 2.6 percent GDP expansion.