The U.S. economy grew at an annual rate of just 0.7% in the fourth quarter of 2025, the Bureau of Economic Analysis reported on Thursday. The second estimate slashed the initial reading of 1.4% in half and came in well below the Dow Jones consensus forecast of 1.5%, marking the weakest quarterly expansion since the economy contracted in early 2022.
The sharp downgrade from the prior quarter’s 4.4% pace signals mounting headwinds for business owners who are already contending with rising energy costs, tightening credit conditions and persistent uncertainty over trade policy.
Government Shutdown Was the Biggest Drag on Growth
Federal government spending and investment plunged at a 16.7% rate during the quarter, subtracting 1.16 percentage points from overall GDP. The 43-day government shutdown that stretched from late October into early December froze federal contracts, delayed permit approvals and disrupted payments to vendors who depend on government work.
Consumer spending, which accounts for roughly two-thirds of economic activity, grew at a 2% clip in the fourth quarter. That was a significant step down from the 3.5% rate in the third quarter and lower than the government’s initial estimate of 2.4%. Business investment outside of housing rose at a 2.2% pace, with much of that spending directed toward artificial intelligence infrastructure and data center buildouts.
Inflation Readings Added to the Mixed Picture
The same BEA release included January 2026 data for the Personal Consumption Expenditures price index, the Federal Reserve’s preferred inflation gauge. The headline PCE rose 2.8% year over year, ticking down slightly from 2.9% in December. Core PCE, which strips out food and energy, accelerated to 3.1% from 3.0% the prior month.
The combination of weaker growth and firming core inflation puts the Federal Reserve in a difficult position. Rate cuts that might support a slowing economy could also risk reigniting price pressures, particularly with oil prices now trading above $100 per barrel for the first time since August 2022 as conflict in the Middle East disrupts global energy supplies.
Labor Market Weakness Is Compounding the Slowdown
The GDP revision arrives alongside troubling employment data. Companies cut 92,000 jobs in January 2026, and for all of 2025, monthly hiring averaged fewer than 10,000 positions, the weakest pace outside of recession years since 2002. Small businesses have been particularly exposed, as the Russell 2000 index of small-cap stocks has underperformed the broader market. These companies typically lack the large cash reserves that help bigger firms absorb periods of economic stress.
For the full year of 2025, GDP posted a 2.1% increase, down one-tenth of a percentage point from the prior reading. That compared with a 2.8% expansion in 2024, suggesting a broader deceleration that predates the fourth-quarter disruptions.
What Comes Next for the Economy
Economists widely expect some of the fourth-quarter losses to be recovered in the first quarter of 2026 as federal spending normalizes following the shutdown. However, the recovery faces several obstacles. The ongoing legislative push on housing affordability reflects broader concerns about cost pressures on American households and business operators.
Rising oil prices driven by instability in the Strait of Hormuz, the possibility of new tariffs following trade investigations into 16 countries and a hiring environment that remains historically weak all threaten to keep growth below trend. The final GDP estimate for the fourth quarter is scheduled for release on April 9.
For entrepreneurs and small business owners, the data underscores a period of elevated caution. Access to capital remains constrained by high interest rates, consumer spending is decelerating, and the federal government, a major source of contracts and economic activity, proved unreliable as a growth engine during the quarter. The coming months will test whether the broader economy can regain momentum or whether the slowdown has deeper roots.
