The government reported 1.4% GDP growth for the fourth quarter of 2025, a sharp drop from summer’s 4.4% pace. But a six-week federal shutdown that furloughed workers and disrupted data collection significantly distorted the headline number. Strip out that effect and the private economy grew at a solid 2.4% pace. Assistance from Claude AI.
The federal government released its first look at economic growth for the final three months of 2025 today, and the number — 1.4 percent — sounds like the economy was barely treading water. After a sizzling 4.4 percent pace in the summer quarter, a drop to 1.4 percent in the fall looks alarming on its face.
But before drawing conclusions, it helps to understand what was happening behind the scenes. A federal government shutdown that lasted six weeks distorted the data in a significant way. Once you account for that, the private economy — the part driven by businesses and consumers like you and me — held up considerably better than the headline number implies.
This report, called the “advance estimate,” comes from the Bureau of Economic Analysis (BEA), a nonpartisan arm of the U.S. Department of Commerce. It’s the first of three estimates BEA publishes for each quarter; the numbers will be revised twice more as better data comes in.
First, What Is GDP and Why Do We Care?
GDP stands for Gross Domestic Product. Think of it as a report card for the entire economy — a single number that tries to capture the total value of everything the country produces in a given period. When GDP grows, it generally means more jobs, more income, and more economic activity. When it shrinks, the opposite tends to be true.
Economists measure GDP growth as an annualized rate, which means they take the quarter’s growth and project it as if that pace continued for a full year. So when BEA says GDP grew 1.4 percent in the fourth quarter, it doesn’t mean the economy grew 1.4 percent in just those three months. It means the economy grew at a pace that, if sustained all year, would add up to 1.4 percent growth. This convention makes comparisons across different time periods easier.
GDP is made up of four main ingredients: what consumers spend (like groceries, medical bills, and vacations), what businesses invest (like buying equipment or building new facilities), what the government spends at all levels — federal, state, and local — and the balance of trade, meaning exports minus imports. When the government pulls back sharply, as happened in the fall of 2025, it can drag down the total even if everyone else is doing fine.
The Shutdown: A Six-Week Wrench in the Works
From October 1 through November 12, 2025, the federal government partially shut down due to a lapse in congressional appropriations — meaning Congress failed to pass a spending bill in time, so agencies ran out of legal authority to spend money. Federal workers were furloughed, meaning they were temporarily sent home without pay (though they later received back pay once the shutdown ended).
Here’s the tricky part: when a furloughed worker sits at home instead of working, the government is receiving less labor — less service — for its money. BEA counts government output largely by measuring the labor that goes into it, so fewer hours worked means less counted output. The agency estimates that this effect alone subtracted roughly one full percentage point from fourth-quarter GDP growth.
Strip out the shutdown’s effect and fourth-quarter GDP growth would have been closer to 2.4 percent — a perfectly normal pace for a healthy economy.
That’s the number worth keeping in mind. Strip out the shutdown’s effect, and fourth-quarter GDP growth would have been closer to 2.4 percent — a perfectly normal pace for a healthy economy. The shutdown didn’t make the economy sick; it just made the report card look worse than the underlying health warranted.
The shutdown also created data headaches for price statistics. Because the Bureau of Labor Statistics couldn’t collect consumer price data in October during the shutdown, BEA had to mathematically estimate what October prices probably were by splitting the difference between September and November. This is a reasonable workaround, but it adds a small layer of uncertainty to the inflation figures in this report.
The Private Economy: A Cleaner Picture
Economists have a specific measure they use to cut through government-related noise: “real final sales to private domestic purchasers.” It’s a mouthful, but the idea is simple — it strips out government spending and the volatile swings in business inventory levels, leaving just the spending by consumers and businesses on actual fixed investments. Think of it as the cleanest window into what everyday economic activity looks like.
By that measure, the economy grew at a 2.4 percent annualized rate in the fourth quarter. That’s down from 2.9 percent in the third quarter, so there was some genuine cooling. But it’s nowhere near a crisis — it’s a modest deceleration, not a cliff.
What drove private-sector activity? On the consumer side, Americans continued spending — but the mix shifted. Spending on services like health care and international travel rose solidly, while spending on goods actually declined slightly. That shift from goods to services has been a recurring theme since the pandemic years, as consumers gradually returned to doing things rather than buying things.
Business investment was a bright spot. Companies increased spending on intellectual property — particularly research and development — and on information processing equipment like computers. Businesses also built up their inventories, especially in wholesale trade and manufacturing. All of this signals that firms were not pulling back in anticipation of hard times.
Government Spending and Exports Pulled the Other Way
Beyond the shutdown’s direct hit on federal labor output, exports also declined during the quarter. Part of that decline, interestingly, was deliberate on BEA’s part: the agency identified and removed a large jump in “exports” of silver bars that were really being used as investment vehicles — people stockpiling silver as a hedge against inflation — rather than as genuine trade in goods. BEA’s accounting rules don’t count investment in precious metals the same way as regular trade, so those transactions were stripped out of the export figures.
State and local governments, by contrast, continued growing at a modest pace, contributing positively to the overall picture.
Inflation: The Numbers Aren’t Headed in the Right Direction
While the growth story has a silver lining, the inflation story is a bit more complicated. The price index for all domestic purchases rose 3.7 percent in the fourth quarter — faster than the 3.4 percent pace seen in the third quarter. The personal consumption expenditures (PCE) price index, which is the Federal Reserve’s preferred inflation gauge, rose 2.9 percent.
To put that in context: the Fed’s target is 2 percent inflation. A reading of 2.9 percent means prices are still rising faster than the Fed would like, though it’s well below the painful 7-plus percent inflation of 2022.
There’s one piece of better news on the inflation front. The “core” PCE — which strips out food and energy prices because those tend to be volatile — came in at 2.7 percent for the quarter, slightly lower than the 2.9 percent core reading in the third quarter. That means the underlying inflation trend may be stabilizing even as the headline number ticked up. For the full year 2025, core PCE averaged 2.9 percent, just a hair above 2024’s 3.0 percent — essentially flat.
The Full Year 2025: Solid, Not Spectacular
Stepping back from the quarter to look at all of 2025, real GDP grew 2.2 percent for the year — down from 2.8 percent in 2024, but still positive and respectable. Consumer spending and business investment were the primary engines of that growth.
The year was shaped by unusual forces: a government shutdown early in the fourth quarter, persistent inflation above the Fed’s target, and an investment boom in technology and intellectual property. None of those forces point to a fundamentally broken economy — but they do paint a picture of an economy navigating real headwinds.
What to Make of All This
The 1.4 percent GDP figure for the fourth quarter of 2025 is best understood as a distorted snapshot rather than an accurate portrait. The government shutdown, which BEA estimates cost about a full percentage point of growth, is largely to blame for the weak headline number. The private economy — businesses investing and consumers spending — held up reasonably well.
That said, the quarter was not without real softness. Consumer spending did decelerate. Exports fell. And inflation, while nowhere near its 2022 peaks, remains stubbornly above where the Federal Reserve wants it. The next estimate, due March 13, will revise these numbers as more complete data becomes available.
The economy ended 2025 in a state of muddling through — not thriving, not collapsing, but carrying forward with resilience beneath a headline that flatters to deceive.
Source: U.S. Bureau of Economic Analysis, GDP (Advance Estimate), 4th Quarter and Year 2025, released February 20, 2026.