The U.S. economy grew at an annualized 0.7 % rate in the fourth quarter of 2025, far below the Commerce Department’s earlier projection of 1.4 %. The downgrade was released Friday by the Commerce Department, which also noted that the economy advanced only 0.7 % from October through December, a stark slowdown after a robust 4.4 % third‑quarter gain the year before.
Consumer spending, the engine of growth, was anemic. In January, nominal spending rose 0.4 %, but after adjusting for inflation the gain shrank to 0.1 %, according to the department’s report. At the same time, gasoline prices surged, averaging $3.63 per gallon—up from $2.94 a month earlier—and have edged close to $4 amid the war in Iran, squeezing household budgets that were already tight from earlier tax‑cut refunds.
Economists warned that the inflationary pressure was not a fleeting blip. “Underlying inflation pressures were already rising ahead of the war in the Middle East and are set to intensify,” said Diane Swonk, chief economist at KPMG. The rise in energy costs has already pushed the core inflation gauge to 2.8 % year‑over‑year in January, with some forecasts seeing it climb above 3.5 % in the coming months.
The Fed’s policy response remains uncertain. While some officials may push for a rate hike at the next meeting, the central bank is expected to stand pat for now, according to Swonk’s assessment.
The government shutdown that lasted 43 days in the fall of 2025 also left a lingering scar. Federal spending and investment plummeted by 16.7 %, shaving 1.16 percentage points off fourth‑quarter growth. “Following two consecutive strong readings for the second and third quarters, the economy was expected to soften heading into year‑end. It’s now increasingly clear that the economy not only slowed but stumbled into the finish line,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. The shutdown, combined with a sharp decline in consumption growth, was a key driver of the slowdown.
Labor market weakness compounds the outlook. Employers cut 92,000 jobs in the most recent month, and hiring has largely stalled since 2025, marking the weakest hiring pace since 2002. Although businesses posted nearly 7 million open positions in January, hiring remained essentially flat, suggesting firms are hesitant to add staff amid economic uncertainty and the growing influence of artificial intelligence on hiring decisions.
Higher gasoline prices are also pressing on the housing market. Mortgage rates have risen since the conflict began, reflecting investors’ expectations of persistent inflation. The housing sector, already in a slump since 2022, faces additional headwinds from higher borrowing costs.
Overall consumer sentiment dipped sharply after the U.S. and Israel’s attacks on Iran, according to a University of Michigan survey released alongside the GDP data. While sentiment had improved in early March, responses collected after Feb. 28—the war’s start—were markedly gloomier, erasing earlier gains.
The data paint a picture of an economy that, while still growing, is increasingly vulnerable to external shocks. Elevated energy costs, fiscal drag from the shutdown, and a tepid labor market threaten to erode the modest gains of the past year, leaving households and policymakers bracing for a tougher end to 2026.