US GDP Growth Slows to 1.4% Amid Shutdown Impact & Rising Inflation

The US economy experienced a significant slowdown in the final quarter of last year, growing at an annualized rate of just 1.4 percent. This figure represents a sharp decline from the 4.4 percent growth seen in the previous three-month period and fell considerably short of Wall Street expectations, which predicted a 2.8 percent increase.

Government Shutdown’s Impact

A Drag on Growth

The primary factor contributing to this deceleration was a 43-day federal government shutdown spanning October and November. The Bureau of Economic Analysis (BEA) estimates this shutdown reduced GDP growth by a full percentage point. A concurrent slowdown in consumer spending also weighed on the overall economic performance, though this was partially offset by increased business investment.

Did You Know? The federal government shutdown lasted 43 days, making it the longest in US history.

Inflation and Federal Reserve Policy

Rising Price Pressures

Alongside the slower GDP growth, price pressures accelerated in December. The Personal Consumption Expenditures (PCE) index – the Federal Reserve’s preferred measure of inflation – rose to 2.9 percent, its highest level since March 2024. This increase, up from 2.8 percent in November, moves inflation further away from the Fed’s 2 percent target.

Implications for Interest Rates

The rising inflation complicates the Federal Reserve’s plans regarding interest rate cuts. Minutes from the Fed’s most recent meeting indicated policymakers believe progress toward the 2 percent inflation goal “might be slower and more uneven than generally expected.”

Expert Insight: The acceleration in inflation, coupled with slower GDP growth, presents a challenging scenario for the Federal Reserve as it attempts to balance price stability with maintaining economic momentum.

Market Reaction and Future Outlook

Initial Muted Response

Initial market reaction to the GDP data was muted, but volatility increased later in the day following a Supreme Court ruling concerning President Trump’s authority to impose tariffs. The dollar index and Treasury yields saw slight increases, while the S&P 500 rose 0.1 percent and the Nasdaq Composite gained 0.3 percent.

Potential for Rebound

Economists anticipate a rebound in government spending in the first quarter of this year could offset the weak performance at the end of 2025. This could position the economy for stronger growth as it enters 2026. Michael Pearce at Oxford Economics noted the “core of the economy is resilient,” and expects momentum to build with fading tariff pressures and increased capital spending.

Risks of Overheating

However, Torsten Sløk, chief economist at Apollo Global Management, cautioned that the uptick in inflation carries a risk of the economy overheating, potentially making it difficult for the Federal Reserve to lower interest rates this year.

Frequently Asked Questions

What was the annualised growth rate of the US economy in the fourth quarter?

The US economy grew at an annualised rate of 1.4 percent in the fourth quarter.

What was the main reason for the slowdown in economic growth?

The primary reason for the slowdown was the 43-day federal government shutdown, which reduced GDP growth by an estimated one percentage point.

What is the current level of the Personal Consumption Expenditures (PCE) index?

The PCE index rose to 2.9 percent in December.

How might the current economic conditions influence the Federal Reserve’s monetary policy decisions in the coming months?