US Economy Slows to 1.4% in Q4 – Two Rate Cuts in 2026 Still Within Expectations
The U.S. economy lost momentum at the end of 2025, with real gross domestic product rising at an annualized rate of 1.4% in the fourth quarter, according to the advance estimate from the U.S. Bureau of Economic Analysis.
- Q4 GDP slowed to 1.4%, down from 4.4% in Q3 (expectations were for 2.8%)
- Consumer spending and investment drove growth
- Government spending and exports declined
- Inflation remained firm, with PCE at 2.9%
- Full-year 2025 growth came in at 2.2%, below 2024’s pace
The reading marks a steep slowdown from the 4.4% pace recorded in the third quarter.
The report, originally scheduled for late January, was delayed due to the October–November 2025 government shutdown. Despite the softer headline figure, underlying private demand remained relatively firm, even as government outlays and exports dragged on overall growth.
What Drove the Slowdown in Q4
The main drivers of fourth-quarter growth were consumer spending and investment. However, both government spending and exports declined, offsetting part of that strength. Imports also fell, but because imports subtract from GDP, the smaller decline compared to the previous quarter slightly dampened the net benefit to growth.
Compared with the third quarter, the deceleration reflected a downturn in government expenditures and weaker exports, along with a moderation in consumer spending. Investment, on the other hand, accelerated and helped cushion the broader slowdown.
Real final sales to private domestic purchasers – a key measure that combines consumer spending and fixed investment and excludes volatile trade and inventory effects – increased 2.4% in Q4, down from 2.9% in Q3. This suggests that while private demand cooled, it remained more stable than the headline GDP figure implies.
Inflation Edges Higher in Q4
Inflation pressures ticked up during the quarter. The price index for gross domestic purchases rose 3.7% in Q4, compared with 3.4% in the previous quarter.
The Federal Reserve’s preferred inflation gauge, the personal consumption expenditures price index, increased 2.9%, slightly higher than the 2.8% pace in Q3. Core PCE, which excludes food and energy, rose 2.7%, easing from 2.9% in the prior quarter.
The combination of slower growth and still-elevated inflation suggests a more challenging macro backdrop heading into 2026, particularly if price pressures prove sticky.
Full-Year 2025 Growth Moderates
For the full year, real GDP increased 2.2% in 2025, down from 2.8% in 2024. The annual expansion was primarily supported by gains in consumer spending and investment.
Inflation for the year showed mixed signals. The gross domestic purchases price index rose 2.6% in 2025, compared with 2.4% in 2024. The headline PCE price index increased 2.6%, unchanged from the previous year, while core PCE edged down slightly to 2.8% from 2.9%.
The fourth-quarter slowdown underscores a cooling growth trend as the economy moves into 2026. While private-sector demand remains positive, softer public spending, weaker exports, and firm inflation will likely keep policymakers and markets on alert in the months ahead.
When asked by Bloomberg, Kathy Bostjancic, Nationwide Mutual Insurance Chief Economist, says that despite these numbers, two rate cuts in 2026 are still within expectations.
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