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The US economy grew at an annualised rate of just 1.4 per cent in the fourth quarter, far below Wall Street expectations, as the record federal shutdown hit government spending.
Friday’s figure from the Bureau of Economic Analysis was sharply down from 4.4 per cent in the previous three-month period and fell well short of expectations of 2.8 per cent in a Bloomberg poll of economists.
Growth was held back by a drop in government spending during the shutdown and a slowdown in consumer spending, the BEA said. That was offset slightly by an uptick in business investment.
“The government shutdown ended up being a much bigger drag on the economy than the Treasury’s data had suggested,” said Paul Ashworth at Capital Economics. He added that he expected the decline to be reversed in a bounceback in first-quarter 2026 GDP.
Price rises accelerated slightly in the fourth quarter, with the personal consumption expenditures index — the Federal Reserve’s preferred measure of inflation — increasing to 2.9 per cent in December, its highest level since March 2024. That compared with 2.8 per cent in November and the Fed’s target of 2 per cent.
Forecasts had swung wildly in the run-up to Friday’s data release as economists attempted to interpret a slew of varying indicators of the health of the US economy, many of which were delayed by the shutdown.
As recently as last month, analysts had expected bumper fourth-quarter growth, driven by robust spending by richer consumers and AI-fuelled business investment. The Atlanta Fed had predicted a GDP growth rate as high as 5.4 per cent.
But expectations had since cooled as more data became available and pointed to decreasing momentum. Figures released on Thursday showed the US trade deficit jumped in December, knocking GDP growth.
Donald Trump sought to pin the growth slowdown on Democrats and the Fed, which he has criticised for not lowering interest rates more quickly.
“The Democrat Shutdown cost the U.S.A. at least two points in GDP. That’s why they are doing it, in mini form, again. No Shutdowns! Also, LOWER INTEREST RATES. “Two Late” Powell is the WORST!!!” he posted on his Truth Social network ahead of the release.
But the BEA said that the hit to federal government services during the shutdown knocked about 1 percentage point off fourth-quarter growth.
“There was a 1 per cent subtraction because of the shutdown,” said Torsten Sløk, chief economist, Apollo Global Management. “The reason why growth was so weak was because of the shutdown. Growth at 2.4 per cent is a perfectly solid number.”
He added that with inflation ticking up, there is a risk that the economy could overheat. “It is going to be very hard for the Fed to cut interest rates this year,” he said.
Market moves were muted in response to the data. The dollar index ticked up while Treasury yields were roughly flat on the day.
Futures tracking the S&P 500 index were down 0.3 per cent.
