The U.S. economy appeared to lose momentum as 2025 came to a close, and the slide carried into early 2026 as households faced higher energy costs and a weaker outlook, according to data released Friday by the Commerce Department and sentiment results released alongside it. The government’s latest snapshot showed growth slowing sharply in the final months of last year, with consumer spending failing to keep up after inflation adjustments.
The Commerce Department reported that the economy advanced at an unexpectedly sluggish 0.7% annual rate from October through December, a downgrade from its prior estimate of 1.4%. It said the government shutdown earlier last fall also weighed on late-year output, and that federal government spending and investment plunged at a 16.7% rate, cutting 1.16 percentage points off fourth-quarter growth.
Separate Commerce Department figures showed that while consumer spending grew modestly in January, inflation-adjusted growth was far weaker. Consumer spending rose 0.4% in January, but it increased by only 0.1% after adjusting for inflation. The report also indicated incomes rose 0.9% after adjusting for taxes and transfers as tax withholding fell because of 2025 tax changes, even as wage growth cooled compared with a year earlier.
In parallel, a University of Michigan consumer sentiment survey suggested that fear and uncertainty intensified after the United States and Israel launched the Iran war, worsening the outlook for spending. The survey showed overall sentiment declined only slightly in March, but it was only half completed when the attack began. Joanne Hsu, director of the sentiment survey, said interviews completed prior to the military action in Iran showed an improvement in sentiment, while “lower readings seen during the nine days thereafter completely erased those initial gains.”
Higher gasoline prices during the conflict added pressure on budgets that were already strained by sticky inflation, the release said. The article said gasoline prices raced closer to $4 per gallon during the war, and it noted that many Americans were set to receive larger-than-usual tax refunds in March and April under President Donald Trump’s tax cut law, even as persistently higher gas costs could absorb much or even all of those gains.
Diane Swonk, chief economist at KPMG, said “Underlying inflation pressures were already rising ahead of the war in the Middle East and are set to intensify,” and added that some Federal Reserve officials could push for a rate hike at next week’s meeting though the central bank would probably stand pat. The report also said mortgage rates have been rising since the conflict began, reflecting investor expectations that inflation will remain high—an additional strain on a housing market that has been in a slump since 2022.
The Commerce Department downgrade and the consumer picture also fit with a broader pattern of sluggish employment and cautious hiring, the report said. The release said companies, nonprofits and government agencies cut 92,000 jobs last month, and that in 2025 they added fewer than 10,000 jobs a month—described as the weakest hiring outside recession years since 2002. It also said a separate report showed companies posted nearly 7 million open jobs in January, up from 6.6 million in December, but overall hiring was essentially unchanged.
Jim Baird, chief investment officer at Plante Moran Financial Advisors, said the government shutdown was a major factor in the loss of momentum heading into year-end, but he also pointed to a “sharp decline in consumption growth” that played a role. Friday’s gross domestic product report was the second of three estimates for fourth-quarter growth, with the final report due April 9.