The U.S. economy entered this year weaker than anyone realized.
The Bureau of Economic Analysis released its second estimate of Q4 2025 GDP Friday morning: 0.7% annualized growth. That's down from the government's initial estimate of 1.4%, and economists had actually expected a revision upward.
The deceleration from Q3's 4.4% growth was steep. Consumer spending grew at a 2% rate in Q4, down from 3.5% the prior quarter. Business investment slowed. Exports fell at a 3.3% annual rate. A key measure of underlying economic strength — consumer spending plus private investment, stripping out exports and government — grew just 1.9%, down from 2.9% in Q3.
For all of 2025, GDP grew 2.1%.
The 43-day government shutdown last fall was the single biggest drag. Federal government spending and investment plunged at a 16.7% annual rate, cutting 1.16 percentage points from Q4 growth on its own.
But Morgan Stanley's Ellen Zentner noted the bigger picture: "With markets laser-focused on oil prices and geopolitics, today's numbers may mostly fly under the radar. Despite signs of economic softening, more sticky inflation data simply strengthens the idea that the Fed will remain on the sidelines."
In other words, a weaker economy doesn't automatically mean rate cuts — not when inflation is still running above 3%.
This is the second of three estimates. The final Q4 number drops April 9.
But the more pressing question is what 2026 looks like from here. The economy was already showing cracks — weak hiring, slowing consumer spending, cooling wage growth — before U.S. and Israeli strikes on Iran pushed gas prices toward $4 a gallon. Higher energy costs feed directly into consumer budgets and inflation, creating a scenario where growth slows and prices stay sticky at the same time.
That's not a great setup for a Fed that's already on hold.
