US Economic Slowdown in Late 2025: Key Factors and Outlook

The US economy’s growth slowed at the end of 2025 as consumer spending weakened and the federal government experienced a partial shutdown. Annualized growth for the October–December quarter was 1.4%, down from a strong 4.4% in the previous quarter.

This slowdown capped a turbulent year marked by new tariffs, stricter immigration policies, cuts to government spending, and persistent inflation. Despite these challenges, the overall economy grew 2.2% in 2025, outperforming many expectations.

Resilience Amid Challenges

Michael Pearce, chief US economist at Oxford Economics, noted that the economy’s core remains resilient, predicting that growth could rebound in 2026. Nevertheless, sharp policy swings, particularly in trade, created volatility in economic data throughout the year.

The year began with a slight contraction, partly due to increased imports as companies rushed goods ahead of expected tariffs. Growth rebounded in spring and summer as imports slowed, before decelerating again in the final months as imports began to recover.

Recent trade data revealed a widening trade deficit in December, prompting last-minute downward revisions to growth forecasts for the fourth quarter.

Spending Trends

Private investment saw gains, mainly in intellectual property and IT equipment. Consumer spending rose 2.4% in the final quarter, down from 3.5% previously. Meanwhile, government spending fell sharply by more than 16%, largely due to the federal shutdown.

Paul Ashworth, chief North America economist at Capital Economics, said the shutdown had a larger negative impact on the economy than earlier data suggested but expects recovery in the coming months.

Political Commentary

US President Donald Trump cited the shutdown as a significant factor in slowing growth, estimating that it “cost the US at least two points in GDP.” The Commerce Department reported that federal service suspensions subtracted roughly one percentage point from GDP in the fourth quarter, though the actual impact may have been higher.

Inflation Considerations

The Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred inflation measure, rose to 2.9% in December from 2.8% in November. Analysts note that while the fourth-quarter slowdown isn’t alarming, the PCE increase could influence Fed policy, potentially delaying interest rate cuts planned for 2026.

Olu Sonola, head of US economics at Fitch Ratings, described the PCE report as a “reality check” that may temper expectations for rate reductions, signaling that inflation remains a concern for policymakers.