By Lucia Mutikani
WASHINGTON, Feb 20 (Reuters) – U.S. economic growth slowed more than expected in the fourth quarter, with government spending posting its biggest decline since 1972 because of last year’s shutdown, but other data remained consistent with a steady pace of expansion.
Most of the drag on gross domestic product from the 43-day shutdown, however, will likely be reversed in the first quarter. Ahead of the release of the Commerce Department’s report on Friday, President Donald Trump flagged the sharper-than-expected slowdown in GDP growth, posting on social media that the “Shutdown cost the U.S.A. at least two points in GDP. That’s why they are doing it, in mini form, again. No Shutdowns! Also, LOWER INTEREST RATES.”
Trump is unlikely to get his wish for rate cuts from the Federal Reserve anytime soon, with other data on Friday showing inflation accelerated in December and is poised to rise further in January. Inflation is being partly driven by Trump’s import tariffs.
“The core of the economy is resilient,” said Michael Pearce, chief U.S. economist at Oxford Economics. “With the economy and labor market stabilizing and inflation still elevated, we expect the Fed will remain on prolonged hold.”
Gross domestic product increased at a 1.4% annualized rate in the fourth quarter, the Commerce Department’s Bureau of Economic Analysis said in its advance estimate. Economists polled by Reuters had forecast GDP would rise at a 3.0% pace. The economy grew at a 4.4% pace in the third quarter. It grew 2.2% last year after expanding 2.8% in 2024.
Federal government spending decreased at a 16.6% rate last quarter, the largest drop since the third quarter of 1972, reflecting fewer services provided by public workers, lower outlays on goods and services and a temporary reduction in benefits from the Supplemental Nutrition Assistance Program during the recent shutdown.
The federal government spending sliced off 1.15 percentage points from GDP growth, the most since the first quarter of 1994. The nonpartisan Congressional Budget Office had estimated the government shutdown would subtract 1.5 percentage points from fourth-quarter GDP, and forecast most of the lost output would eventually be recovered, though between $7 billion and $14 billion would not.
Away from the federal government, the economy held up in the final three months of 2025, thanks to a still-healthy pace of consumer spending and business investment in artificial intelligence.
Consumer spending, which accounts for more than two-thirds of the economy, grew at a 2.4% rate. That reading followed the third quarter’s brisk 3.5% pace. Economists say spending has largely been driven by higher-income households and has come at the expense of saving as inflation erodes buying power.
Consumer spending could get a tailwind from what economists anticipate will be larger tax refunds this year because of the Trump administration’s tax cuts. Business spending on intellectual property products surged at a 7.4% rate, mostly reflecting research and development linked to AI. Economists estimated AI, including data centers, semiconductors, software and research and development, accounted for a third of GDP growth in the first three quarters of 2025, blunting the hit from tariffs and reduced immigration.
U.S. stocks were trading higher. The dollar slipped against a basket of currencies. U.S. Treasury yields mostly rose.
DOMESTIC DEMAND REMAINS SOLID
Trade was neutral to GDP growth, while inventories made a small contribution. Residential investment contracted for a fourth straight quarter as builders and prospective homebuyers struggled with higher borrowing costs.
Final sales to private domestic purchases, which excludes government, trade and inventories, grew at a 2.4% rate. This measure of domestic demand, which policymakers focus on, increased at a 2.9% pace in the July-September quarter.
A separate report from the BEA showed inflation pressures building in December. The Personal Consumption Expenditures Price Index increased 0.4% in December after rising 0.2% in November. PCE inflation increased 2.9% on a year-over-year basis after gaining 2.8% in November.
Excluding the volatile food and energy components, the PCE Price Index rose 0.4% after gaining 0.2% in November. Economists polled by Reuters had forecast the so-called core PCE price index would climb 0.3%. In the 12 months through December, core PCE inflation advanced 3.0% after increasing 2.8% in November.
The U.S. central bank tracks the PCE inflation measures for its 2% target.
Though the Bureau of Labor Statistics’ Consumer Price Index report published last week showed a moderate increase in January, there was some stickiness in services inflation. Economists also noted a surge in legal services in January.
“This category, which the BLS does not publish, but can be backed out, registered a 12.0% month-on-month increase in January, which alone is worth about 10 basis points on core PCE inflation,” said Pooja Sriram, an economist at Barclays. “That said, this tends to be a very volatile category, with very little forward-looking inference.”
Economists estimated core PCE inflation could increase by as much as 0.4% on a monthly basis in January, which would translate to a year-on-year advance of 3.1%.
Those forecasts could change after the release next Friday of the Producer Price Index report for January. PCE inflation data for January will be released on March 13. The reports have been delayed by last year’s shutdown.
Economists do not expect the Fed to cut rates before its June 16-17 meeting.
(Reporting by Lucia Mutikani; editing by Chizu Nomiyama and Paul Simao)
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