The U.S. economy showed clear signs of cooling this week with the release of new data from the Bureau of Economic Analysis on February 20, 2026.
Real gross domestic product increased at an annualized rate of 1.4% in the fourth quarter of 2025, covering October through December. This marked a sharp drop from the 4.4% growth rate recorded in the third quarter of 2025. Economists had expected growth closer to 3.0%. For the full year of 2025, real GDP expanded by 2.2%, the slowest annual pace since 2020 and down from 2.8% in 2024.
Key Drivers of the Slowdown
The slowdown stemmed from multiple factors. A six-week government shutdown from October 1 to November 12, 2025, caused the largest decline in government spending since 1972. The Bureau of Economic Analysis estimated this shutdown reduced fourth-quarter growth by about 1 percentage point.
Consumer spending, which drives roughly 70% of economic activity, rose at 2.4% in the quarter, down from 3.5% in the third quarter and weaker than prior trends. Exports declined, and overall private sector activity moderated.
Administration and Policy Response
President Donald Trump addressed the report directly on Truth Social before its release. He stated the shutdown cost the U.S. at least two points in GDP and called for no more shutdowns along with lower interest rates.
The administration pointed to the shutdown as the primary cause of the weak number, noting that federal operations resumed and private sector elements like business investment in equipment and intellectual property held up better.
PMI Data and 2026 Outlook
Recent PMI data from S&P Global reinforced the cooling trend into early 2026. The composite PMI fell to 52.3 in February 2026, down from 53.0 the prior month and the weakest level since April 2025. This reading pointed to continued expansion above the 50 threshold but at a slower pace.
Regression analysis of historical PMI against GDP suggested annualized growth around 1.5% in the first months of 2026, consistent with the fourth-quarter slowdown persisting.
Inflationary Pressures
Inflation pressures remained elevated despite the growth deceleration. The personal consumption expenditures (PCE) price index rose 2.9% year-over-year in December 2025, up from prior months.
Core PCE, excluding food and energy, increased to 3.0% annually, above the Federal Reserve’s 2% target. The price index for gross domestic purchases accelerated to 3.7% in the fourth quarter from 3.4% in the third. These figures reflected ongoing price pressures from various sources, including prior trade policies.
Trade, Tariffs, and Legal Rulings
The fourth-quarter report followed a year of policy shifts under the Trump administration. Tariffs imposed in 2025 raised import costs, with some analyses estimating pass-through to consumers exceeding 50% in certain cases. The administration pursued broad tariffs aimed at protecting domestic industry and reducing trade deficits.
A Supreme Court ruling on February 20, 2026, struck down certain emergency tariffs imposed under the International Emergency Economic Powers Act, finding overreach in authority. The decision led to potential refunds of collected duties and a shift to alternative authorities like Section 122 for temporary measures. Markets reacted positively to the ruling, with stocks rising as it eased some cost burdens on businesses and households.
Labor and Investment Trends
Immigration enforcement tightened net inflows significantly in 2025, reducing labor supply compared to prior decades. This contributed to slower potential output growth in some projections.
A major reconciliation act passed in 2025 delivered tax cuts and investment incentives, particularly benefiting sectors like artificial intelligence and equipment. These measures supported business fixed investment, which cushioned the fourth-quarter slowdown.
Mixed Signals and Future Forecasts
The economy entered 2026 with mixed signals. Private final domestic demand stayed solid in many areas. Forecasts varied on the near-term path.
- Some analysts, including Capital Economics, projected a rebound to 3% annualized growth in the first quarter of 2026 as shutdown effects reversed.
- Others, including Conference Board projections, anticipated more muted expansion around 2.1% for the year.
The unemployment rate held near 4.6%, with job growth stable but slower than peak levels.
Perspectives on Growth and Regulation
Critics of expansive government spending and regulatory overreach highlighted the shutdown’s role in distorting data. They argued that avoiding future closures and maintaining pro-growth policies like tax relief and deregulation would restore stronger momentum. The administration’s focus on energy production drove gas prices lower in parts of 2025, providing relief to households despite broader inflation.
The fourth-quarter GDP figure and accompanying PMI data confirm a meaningful slowdown from the robust third-quarter performance. Persistent inflation above target limits immediate Federal Reserve rate cuts, even as growth cools. Business investment and consumer resilience provide a foundation for recovery once temporary drags like the shutdown fade.
The U.S. economy faces a clear test in early 2026, but the underlying private sector strength and policy adjustments signal potential for renewed expansion without returning to prior high-debt, high-regulation patterns.
