GDP silver lining: Americans are spending, businesses are investing
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First, the good news about the disappointing fourth-quarter GDP number released Friday morning: Q1 ought to be a blockbuster.
The big picture: The underlying trend of U.S. economic growth looks quite solid, despite a weak headline number from a quarter when the federal government was shuttered for 43 days.
- American consumers keep spending, and American businesses keep investing.
By the numbers: Overall GDP rose at a 1.4% annual rate in the final three months of 2025, far below analysts' expectations.
- It turns out that analysts failed to adequately account for the impact of the shutdown (encompassing roughly half the quarter) on federal expenditures.
- Federal government spending subtracted 1.15 percentage points from overall growth, so excluding the government growth tracked about a 2.6% annual rate — right in the range of forecasts.
- That raises a strong likelihood that federal spending will create a counteracting surge in the first quarter, creating a growth tailwind to start the year.
- Real final sales to private domestic purchasers, a less-volatile measure of underlying demand in the economy, rose 2.4% in Q4, down a bit from 2.9% in Q3 but still quite solid.
Zoom in: The drivers of growth for most of 2025 remained intact. Personal consumption expenditures added 1.6 percentage points to growth, and nonresidential fixed investment — business capital spending — contributed 0.45 points.
- Consumer spending was driven heavily by services spending, especially health care, while spending on physical goods was basically flat.
- Some of the strongest gains in business spending remained in AI-adjacent areas, with growth in information processing equipment and software recorded.
What they're saying: "The disappointing end to the year largely reflected a self-inflicted drag from the longest government shutdown in U.S. history," EY-Parthenon chief economist Gregory Daco wrote in a note.
Yes, but: The more negative piece of news out Friday morning was in a separate report on December consumer spending, incomes and inflation.
- The Personal Consumption Expenditures Price Index, favored by the Federal Reserve, ticked up to 2.9% for the 12 months ending in December, from 2.8% in November.
- Excluding volatile food and energy, it rose even more, to 3% from 2.8%.
