The US economy slows after the pandemic
The US economy experienced a significant slowdown in the closing months of 2025, as the unprecedented government shutdown impacted economic activity, culminating in a year marked by the weakest growth since the pandemic. Nevertheless, it was not as dire as the worst-case scenario that economists had anticipated when President Donald Trump introduced his extensive tariffs last spring. The economy experienced growth in 2025, even in the face of tariffs, a stringent crackdown on immigration, and one of the most sluggish periods of job creation since the Great Recession, primarily due to the ongoing spending of affluent consumers. The Commerce Department reported on Friday that the gross domestic product, which quantifies the total goods and services produced within the economy, recorded an annualized growth rate of 1.4% for the period from October to December. That represents a significant deceleration from the 4.4% rate observed in the third quarter, and it falls short of the 1.9% rate that economists anticipated in a survey. The GDP is modified to account for seasonal fluctuations and inflationary pressures.
In 2025, the economy experienced a growth of 2.2%, marking the slowest rate since 2020. Stephanie Roth stated that last year’s slower growth, in comparison to previous years, was “great given how much labor supply is down.” She stated “You could call it ‘Goldilocks.’” The reductions in federal spending, resulting from the shutdown, reduced growth by 1.1 percentage points last quarter, as stated in the report, with economists generally anticipating that a significant portion of those losses will be recovered in the early part of this year. Consumers’ slight pullback on goods purchases also impacted fourth-quarter GDP. The reading for the fourth quarter was postponed by a month due to the government shutdown that occurred last year. Consumer spending, the lifeblood of the US economy, decelerated in the fourth quarter to an annual rate of 1.4%, marking the weakest pace since early 2025. Throughout the past year, spending patterns have varied significantly across income brackets, with the most financially vulnerable Americans struggling under the burden of increasing debt, a decelerating labor market, and the effects of cumulative inflation experienced over recent years. “A slower pace of consumer spending was expected for the final quarter of 2025, as some Americans had just shelled out for a new car before electric vehicle tax credits expired,” said Brett Ryan. Ryan anticipates that the key economic engine will regain momentum in the early part of this year, primarily due to tax refunds. He noted that there’s “certainly nothing that would get you too concerned about an imminent consumer slowdown.”
The growing disparity in America has led households with limited resources to become increasingly disillusioned with the economy over the past year. In a separate report on Friday, the University of Michigan indicated that consumer sentiment persisted in its divergence between individuals with college degrees and stock investments, and those lacking these qualifications. “A sizable month-to-month increase in sentiment for the largest stockholders was fully offset by a decline among consumers without stock holdings,” said Joanne Hsu in a release. “Similar divergences were observed across income and education, with higher-income or college-educated consumers showing increases in sentiment, while their lower-income or less-educated counterparts did not.” In the fourth quarter, business spending saw an increase, rising to 3.7% from the previous three-month period’s 3.2%. Ryan stated, “AI spending is still definitely doing a lot of heavy lifting” on the business investment side. A separate report from the Commerce Department released on Friday indicated that consumer spending stayed positive in December; however, the factors sustaining those purchases weakened, and inflation surged to its highest level in almost two years.
Consumer spending increased by 0.4% in December; however, when adjusted for inflation, the growth rate was merely 0.1% compared to November, as indicated by the report that was delayed due to the shutdown and was initially set for release on January 29. Personal incomes increased by 0.3% for the month, partly driven by a significant settlement awarded to victims of the Maui wildfires. When considering inflation, personal income growth remained stagnant. Savings as a percentage of after-tax income fell to 3.6%, marking its lowest rate since October 2022. Meanwhile, the Federal Reserve’s preferred inflation gauge rose to 2.9%, moving further away from the central bank’s 2% target. It marks the highest annual rate since March 2024. According to data from the Commerce Department, goods-related price increases contributed to the 0.4% monthly inflation gain. Trump’s implementation of steep tariffs on imported goods has led to increased prices for various products, including furniture, appliances, and toys. Excluding the fluctuating prices of energy and food, a key indicator of the underlying inflation trend has reached its highest level in almost a year. The core PCE price index increased by 0.4%, reaching an annual rate of 3%.
