Shutdown Shock: US Economy Slows in Late 2025

US GDP slows to 1.4% in Q4 after a government shutdown hit growth, while AI investment and tax cuts aim to cushion the economic slowdown.

sarah

Feb 22, 2026 - 10:27

Shutdown Shock: US Economy Slows in Late 2025

US economic growth slowed more than expected in the fourth quarter due to disruptions from last year's government shutdown and a decline in consumer spending, but this year's tax cuts and investment in artificial intelligence were expected to support activity.

The Commerce Department's Bureau of Economic Analysis said in its advance estimate of fourth-quarter GDP on Friday that gross domestic product (GDP) grew at a 1.4% annual rate in the previous quarter. Economists polled by Reuters had expected GDP to grow at a 3.0% pace. However, the survey was completed before data on Thursday showed the trade deficit in December reached its highest level in five months.

The economy grew at a 4.4% pace in the third quarter. The non-partisan Congressional Budget Office (CBO) estimated that the government shutdown would reduce fourth-quarter GDP by 1.5 percentage points due to fewer services provided by federal employees, lower federal spending on goods and services, and a temporary reduction in Supplemental Nutrition Assistance Program benefits. The CBO estimated that most of the lost output would eventually be recovered, although between $7 billion and $14 billion would not be recovered.

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Before the report was released, Donald Trump posted on social media that "the shutdown cost the U.S.A. at least two points of GDP. That's why they're doing it again in a smaller form. No shutdown! Plus, interest rates are low."

The report, delayed due to the record 43-day government shutdown, highlighted a jobless economic expansion as well as a "K-shaped" economy, in which higher-income households are doing well while lower-income consumers struggle amid inflation fueled by import tariffs and stagnation in wage growth.

These conditions have created what economists and Trump's opponents call an affordability crisis. Only 181,000 jobs were created last year, the fewest outside of a pandemic since the Great Recession of 2009, and fewer than the 1.459 million created in 2024.

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Consumer spending growth slowed from a robust 3.5% pace in the third quarter. Economists say spending was driven mostly by higher-income households and came at the expense of savings as inflation eroded purchasing power.

Economists estimate that higher tax refunds this year due to tax cuts could boost consumer spending. Economists estimate that AI, which includes datacenters, semiconductors, software, and research and development, will account for a third of GDP growth in the first three quarters of 2025, offsetting losses from tariffs and reduced immigration. The old report likely won't have any impact on monetary policy.

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