The U.S. economy lost considerable momentum at the end of 2025, with growth slowing sharply as inflation proved more persistent than desired, according to data released Friday by the Commerce Department's Bureau of Economic Analysis. The conflicting signals present a complex challenge for Federal Reserve policymakers weighing the timing of potential interest rate cuts.
Growth Cools Amid Shutdown Impact
Real gross domestic product increased at an annualized rate of 1.4% in the fourth quarter, a steep decline from the 4.4% pace recorded in the third quarter. For the full year 2025, economic growth moderated to 2.2%, down from 2.8% in 2024. The Bureau noted that the October–November federal government shutdown subtracted approximately one percentage point from fourth-quarter growth, citing lost labor from furloughed employees. Consumer spending and private investment provided support during the quarter, but weaker government expenditures and exports acted as drags.
Inflation Remains Above Target
Concurrently, price pressures showed little sign of abating. The core Personal Consumption Expenditures price index, which excludes volatile food and energy costs and is closely watched by the Fed, rose 0.4% in December. This brought the annual increase to 3.0%, unchanged from November and still a full percentage point above the central bank's 2% target. The headline PCE index increased 2.9% from a year earlier. Personal income and disposable personal income each rose 0.3% in December, while consumer spending increased 0.4%.
Market Reaction and Political Response
Financial markets reacted negatively to the mixed economic picture. Following the data release, S&P 500 E-mini futures fell 0.28%, Nasdaq 100 E-mini futures dropped 0.39%, and Dow Jones Industrial Average E-mini futures declined 0.23%. In remarks made prior to the report's publication, former President Donald Trump attributed the weaker growth figures to the government shutdown and advocated for lower interest rates.
Economists Weigh a Divided Landscape
Analysts described an economy exhibiting divergent trends. "We continue to see a divided economy," one economist noted, pointing to sustained spending by wealthier households while others feel pinched by higher costs. Factors such as tax cuts and a surge in artificial intelligence-related investment are expected to provide some economic support in 2026. However, real disposable income largely stagnated in the quarter, and core inflation has made "no progress since mid-2024," according to Lou Crandall of Wrightson ICAP.
Implications for Monetary Policy
The December core PCE reading of 0.4% exceeded the 0.3% consensus forecast, raising concerns that inflationary pressures could reaccelerate in early 2026. This strengthens the view that the Federal Reserve is unlikely to adjust its benchmark interest rate before June. Barclays economist Pooja Sriram highlighted a concerning 12% monthly surge in legal services prices for January, which could add roughly 10 basis points to core PCE, though she cautioned the category is highly volatile. The next crucial data point, the PCE report for January, is scheduled for release on March 13.
Looking Ahead
The advance GDP estimate is subject to revision as more complete data becomes available, a process complicated by the recent government shutdown. While softer growth typically builds a case for monetary easing, persistently elevated inflation complicates that narrative, leading to volatile shifts in rate expectations. Upcoming data on consumer spending will be critical to gauge whether households are beginning to pull back in the face of sustained price increases. Policymakers are seeking clear, consistent trends rather than another period of erratic and unpredictable economic indicators.
