The U.S. economy expanded at an annualized rate of just 1.4 percent in the fourth quarter of 2025, a sharp deceleration from the 4.4 percent pace recorded in the third quarter, according to the Bureau of Economic Analysis advance estimate released February 20, 2026. This preliminary reading — the first of three — is based on incomplete source data and will be revised twice before a final figure is established. Crucially, the headline number was materially distorted by an exogenous shock: the October–November 2025 federal government shutdown, which BEA estimates subtracted approximately 1.0 percentage point from real GDP growth in the fourth quarter. Stripping out that one-time drag, underlying growth was closer to 2.4 percent — a figure that aligns with the real final sales to private domestic purchasers reading and paints a considerably more resilient picture of private-sector demand.
It is also worth noting that this advance report was itself delayed — originally scheduled for January 29, 2026, it was rescheduled due to the same October–November shutdown. Additionally, BEA was forced to impute October 2025 consumer price index data because BLS could not collect it during the funding lapse, deriving seasonally adjusted price indexes using the geometric mean of September and November CPI readings.
The Government Shutdown's Outsized Footprint
The single largest drag on fourth-quarter growth was a decline in government spending, driven entirely by the federal sector. Both nondefense and defense consumption expenditures fell as furloughed federal employees supplied fewer labor services from October 1 through November 12. BEA estimates this labor-services reduction alone subtracted about 1.0 percentage point from the headline growth rate. Because furloughed workers ultimately received back pay, the shutdown had no impact on nominal federal compensation — it instead registered as a temporary spike in the implied price of federal employee services, an accounting quirk that will partially unwind in subsequent quarters. Exports also declined, partly reflecting BEA's decision to strip out a surge in silver bar exports that represented investment flows rather than genuine trade in goods and services — a methodologically correct but growth-reducing adjustment.
Consumer Spending and Investment Carried the Quarter
Above the government-sector noise, the private economy showed meaningful resilience. Consumer spending advanced, led by services — particularly health care and international travel. Within health care, both outpatient services and hospital and nursing home services posted gains, supported by Bureau of Labor Statistics Current Employment Statistics data on employment, earnings, and hours. International travel, tracked through BEA's International Transactions Accounts, was the standout within the broader "other services" category.
Goods spending, by contrast, declined — a reminder that the durable goods component remains the more cyclically sensitive half of the consumption ledger. Investment was a genuine bright spot: intellectual property products (led by research and development), private inventory accumulation in wholesale trade and manufacturing, and information processing equipment (notably computers and peripherals) all contributed positively. The inventory build, while adding to the headline, is worth watching — inventory swings are notoriously volatile and can reverse sharply.
Real final sales to private domestic purchasers — which strips out both inventories and net exports to isolate core domestic demand — rose 2.4 percent, down from 2.9 percent in the third quarter but still solid. This metric is the cleanest read on underlying momentum, and its resilience suggests the economy's private foundation remained intact even as the government sector contracted.
Inflation Edged Higher as Imputed Prices Complicate the Read
The price picture warmed slightly in the fourth quarter. The gross domestic purchases price index rose 3.7 percent, up from 3.4 percent in the third quarter. The headline PCE price index increased 2.9 percent, compared with 2.8 percent in Q3. Core PCE — excluding food and energy — actually eased to 2.7 percent from 2.9 percent, suggesting that the firming in headline prices was concentrated in food and energy categories rather than in broad underlying inflation. For the full year 2025, the PCE price index rose 2.6 percent, matching its 2024 pace, while core PCE edged down to 2.8 percent from 2.9 percent.
The monthly PCE price index data through January 2026 shows the index reaching 128.97, up 2.8 percent year-over-year from January 2025. Monthly momentum has been modest: the index rose 0.2 percent in November, 0.4 percent in December, and 0.3 percent in January — a trajectory consistent with inflation that remains above the 2 percent target but is no longer accelerating.
It bears repeating that October 2025 PCE price data was imputed by BEA using a geometric mean of September and November CPI readings, given BLS's inability to collect October CPI during the shutdown. This introduces an additional layer of uncertainty into the Q4 inflation figures beyond the normal advance-estimate caveat.
Revision Context and the Road Ahead
The advance estimate carries its usual asterisk: the mean absolute revision between the advance and third estimate historically runs around 0.5 percentage point. The Q4 2025 reading of 1.4 percent could plausibly settle anywhere between roughly 0.9 and 1.9 percent once all source data are incorporated. The revision context for this release includes a downward adjustment to Q4 GDP growth from 0.7 percent to 0.5 percent (at a quarterly, non-annualized rate) — a notable 0.2 percentage point reduction that reflects updated source data incorporated at the second estimate stage. PCE price index revisions for October through December 2025 were negligible, each amounting to less than 0.01 index point.
For 2025 as a whole, real GDP grew 2.2 percent — a step down from 2.8 percent in 2024 but not a dramatic deterioration. The deceleration largely reflects the Q4 government shock and a softer first quarter (which posted a -0.6 percent annualized contraction) rather than a broad-based loss of private momentum.
The second estimate for Q4 2025 GDP is scheduled for release on March 13, 2026. The key data point to watch is whether the private inventory contribution is revised lower — a common pattern as Census Bureau inventory book value data is refined — and whether the government spending drag narrows as back-pay accounting is fully processed. A second-estimate headline above 1.7 percent would suggest the advance print was overly pessimistic; a reading below 1.0 percent would confirm genuine economic softening beyond the shutdown effect.