U.S. Economic Growth and Government Shutdown Impact
The U.S. economy saw a growth of 1.4% annually in the fourth quarter of 2025, but roughly 1 percentage point was lost due to the government shutdown in October and November, based on early estimates from the Bureau of Economic Analysis released on Friday.
If the shutdown hadn’t happened, growth could have reached around 2.4%. That’s still a slowdown compared to a robust 4.4% in the third quarter, but the decline would have been less dramatic. This report illustrates how the 43-day shutdown hindered economic activity, even as the private sector continued to grow.
Growth in personal consumption and business investment led the way, with a better trade balance also lending a hand. It seems the economy is shifting from one reliant on government spending to one driven more by private enterprises.
The BEA mentioned that the complete effects of the partial federal shutdown can’t be fully assessed because they’re integrated into regular data sources. However, they estimated that reductions in federal employee services could lower real GDP growth by approximately 1 percentage point.
President Trump, on his Truth Social account, suggested that the shutdown might have cut GDP by 2 percentage points and urged the Federal Reserve to reduce interest rates.
In the fourth quarter, federal spending dropped at an annualized rate of 16.6%, with both defense and non-defense budgets taking a hit. Since furloughed employees ended up receiving back pay, the shutdown temporarily inflated the cost for federal employee services without affecting current compensation levels.
Personal consumption added about 1.58 percentage points to growth this quarter, mainly due to spending on services. Business investment contributed 0.66 percentage points, driven by increases in intellectual property products, equipment, and inventory buildup.
Imports, which subtract from GDP figures, declined by 1.3%, resulting in a slight improvement in the trade balance since the drop in imports was steeper than that of exports.
Overall economic growth for 2025 stood at 2.2%, down from 2.8% in 2024. This decline reflects less consumer spending and investment compared to previous years.
Anti-inflation strategies showed mixed results. The PCE price index increased by 2.9% in the fourth quarter, slightly up from 2.8% in the third quarter. However, core PCE inflation (excluding food and energy) eased from 2.9% to 2.7%.
This report was initially set for release on January 29 but was delayed due to the government shutdown affecting data collection by the Bureau of Labor Statistics. The BEA used a geometric mean of September and November data to estimate the price index.
Consumer spending grew by 2.4% this quarter, which is a slowdown from the 3.5% seen in the third quarter, but still considered strong. Spending on services jumped by 3.4%, led by healthcare and other services such as international travel. Meanwhile, goods spending remained roughly unchanged, as a decline in durable goods balanced out an increase in non-durable goods.
Corporate capital investment rose by 2.6%, with non-residential investment up by 3.7%. Investment in intellectual property, including research and development, increased by 7.4%, indicating ongoing corporate investment in technology and innovation.
The nature of this growth suggests the economy is transitioning towards a more sustainable trajectory after several quarters of government-led spending. Domestic private final sales, which include personal consumption and corporate capital investment, rose by 2.4% in the fourth quarter.
State and local government spending went up by 2.4%, partially counterbalancing the drop in federal spending and showcasing the contrast between federal challenges and the continued functioning of state and local governments.
These preliminary estimates will likely undergo two revisions in the coming months as more complete data becomes available.
