Economic growth was much slower than expected in the final three months of 2025 while core inflation rose to start 2026, the Commerce Department reported Friday.
Gross domestic product, a measure of all the goods and services produced across the sprawling U.S. economy, rose at a seasonally and inflation-adjusted annual rate of just 0.7% in the fourth quarter, according to the department's Bureau of Economic Analysis.
The first revision of the GDP reading was a sharp step down from the previous estimate of 1.4% and well below the Dow Jones consensus forecast for 1.5%. It also marked a considerable slowdown from the 4.4% gain in the prior period.
For the full year, GDP posted a 2.1% increase, or one-tenth of a percentage point lower than the previous reading. In 2024, the economy rose at a 2.8% pace.
According to the BEA, the downward revision came due to adjustments in consumer and government spending and exports. A decline in imports, which technically subtract from GDP, also was less than the previous estimate.
Consumer spending rose 2% for the quarter, following a 0.4 percentage point downward revision that represented a decline from the 3.5% increase in the third quarter. The largest contribution for the downward revision from services, specifically health care spending, according to the release.
On the inflation side, readings for January were mostly in line with estimates, though they showed price increases running well ahead of where the Federal Reserve would like.
The personal consumption expenditures price index, the Fed's primary forecasting tool for inflation, posted a seasonally adjusted gain of 0.3% for the month, putting the annual rate at 2.8%. Economists surveyed by Dow Jones had been looking for respective readings of 0.3% and 2.9%.
Stripping out volatile food and energy costs, the core PCE inflation rose 0.4% in January and 3.1% on a 12-month basis. Fed officials focus more closely on the core reading as a better indication of longer-run trends. The core reading was 0.1 percentage point higher than December.
A separate Commerce Department report showed that orders for long-lasting goods such as transportation equipment, appliances and computers were flat in January, well below the estimate for a 1.3% gain though an improvement on the 0.9% decline in December. Excluding transportation, orders rose 0.4%.
"The big downward revision in GDP is a gut check going into this energy crunch, increasing the risk of stagflation," said David Russell, global head of market strategy at TradeStation. "The soft January durable goods data also suggests the economy entered this crisis weaker than hoped. This creates challenges for investors with PCE inflation still running well above the Fed's target."
Though the numbers are dated, they nonetheless provide a snapshot of inflation pressures and economic growth heading into the Supreme Court decision voiding many of President Donald Trump's tariffs that he exercised under provisions in the International Emergency Economic Powers Act. Economists generally assumed that tariffs had added about half a percentage point or a bit more to inflation trends.
The report also predates the Feb. 28 attacks that the U.S. and Israel launched against Iran. Energy prices have surged in the nearly two weeks since the conflict began, with the Brent crude international benchmark touching $100 a barrel Thursday.
The inflation data "tells us that the inflation picture wasn't looking good even before the Middle East crisis," said Sonu Varghese, chief macro strategist for the Carson Group. "An already large headache for the Federal Reserve is going to turn into an even larger one, and it's likely the Fed will not cut rates in 2026 and may even start talking about rate hikes later this year."
Personal income and spending in January both increased 0.4%, against respective estimates for 0.5% and 0.3%. The personal saving rate jumped half a percentage point to 4.5%.
Within the GDP report, a proxy for demand known as private sales to private domestic purchasers increased just 1.9% in Q4, revised down by half a percentage point and a full point lower than the prior quarter.
Fed officials watch the PCE gauge closely as they consider it a broader inflation measure than the consumer price index, and use the private sales metric as a proxy for broader economic activity. Earlier this week, the Bureau of Labor Statistics reported a February headline CPI rate of 2.4% and core at 2.5%, the latter being the lowest reading since March 2021 though still above the Fed's 2% target.
The central bank will issue its next rate decision Wednesday. Markets are assigning a near 100% probability that the rate-setting Federal Open Market Committee will remain on hold.
Facts Only
U.S. GDP grew at a 0.7% annualized rate in Q4 2025, revised down from 1.4%.
The revision stemmed from lower consumer spending, government spending, and exports, with imports declining less than previously estimated.
Full-year 2025 GDP growth was 2.1%, slightly below the prior estimate and down from 2.8% in 2024.
Consumer spending rose 2% in Q4, revised down from an initial estimate, with health care services contributing to the decline.
The PCE price index rose 0.3% in January 2026, with core PCE up 0.4% for the month and 3.1% year-over-year.
Durable goods orders were flat in January, missing the 1.3% forecast but improving from December’s 0.9% decline.
Personal income and spending each increased 0.4% in January, while the savings rate rose to 4.5%.
The Supreme Court voided many of Donald Trump’s tariffs in early 2026, which economists estimated had added about 0.5% to inflation.
U.S. and Israeli airstrikes on Iran began on February 28, 2026, causing Brent crude to approach $100 a barrel.
The Federal Reserve’s next rate decision is scheduled for March 2026, with markets pricing in a near-certain hold.
Executive Summary
Full Take
The strongest version of this narrative highlights genuine economic headwinds: slowing growth, sticky inflation, and geopolitical shocks that could exacerbate stagflation risks. The data is presented with appropriate caveats—pre-dating recent crises—and acknowledges the Fed’s dilemma. However, the framing leans toward alarmism, emphasizing "gut checks" and "large headaches" without proportional counterweight. The inclusion of geopolitical events (tariffs, Iran strikes) as looming threats, while relevant, risks amplifying uncertainty without concrete causal links to the current data.
Patterns detected: **ARC-0024 Ambiguity** (vague framing of "stagflation risks" without defining thresholds), **ARC-0043 Motte-and-Bailey** (shifting between specific data and broad warnings of "economic crisis").
Root cause: The narrative assumes inflation is primarily demand-driven, though supply-side shocks (tariffs, energy prices) play a clear role. The unstated paradigm is that the Fed’s tools are the sole lever for stability, ignoring fiscal policy or structural reforms.
Implications: Human agency is framed as reactive—consumers saving more, investors facing "challenges"—while systemic forces (geopolitics, central bank policy) dominate. The costs fall disproportionately on wage earners facing inflation, while beneficiaries (e.g., energy producers) are unmentioned.
Bridge questions: How much of the inflation is transient (energy spikes) versus structural? Would fiscal stimulus or tariff adjustments alter the trajectory more than Fed rate hikes? What historical parallels (e.g., 1970s oil shocks) are most relevant here?
Counterstrike scan: A coordinated influence campaign would exaggerate stagflation fears to undermine confidence in institutions or justify aggressive policy shifts. This article stops short of that, but the selective emphasis on risks over resilience could align with such a playbook if amplified by partisan actors. The content itself remains within bounds of legitimate analysis.
Sentinel — Human
The article exhibits strong human writing characteristics, with natural stylistic variation, specific attributions, and contextual depth. No significant synthetic signals detected.