Washington (United States) (AFP) – The US economy grew at a significantly slower pace than initially estimated for the final months of 2025, government data showed Friday, a major downgrade that comes as fallout from war in the Middle East looms. US GDP rose at an annual rate of 0.7 percent in the fourth quarter, the Commerce Department said. This was sharply down from an earlier estimated 1.4 percent and below the third quarter’s 4.4 percent advance. Growth was dragged by a lengthy government shutdown between October and mid-November.
But latest figures also suggest the world’s biggest economy could have been on a weaker footing than anticipated ahead of US-Israeli strikes targeting Iran on February 28 that have since plunged the crude-rich region into war. Already, the conflict has roiled energy markets and sent fuel prices surging, fanning inflation worries. The tepid showing caps the first full year of Donald Trump’s return to the presidency. Beyond the shutdown, worries over a cooling jobs market and stubborn inflation are growing. In the fourth quarter, the growth adjustment reflected “downward revisions to exports, consumer spending, government spending, and investment,” the Commerce Department said. Imports decreased less than initially calculated.
A separate report showed Friday that the Federal Reserve’s preferred inflation gauge came in slightly cooler than expected in January. But the 2.8 percent level remains above the central bank’s longer-term target of two percent. Excluding volatile food and energy costs, the personal consumption expenditures price index was up 3.1 percent.
“The disappointing end to the year largely reflected a self-inflicted drag from the longest government shutdown in US history, but private sector demand also softened modestly,” said EY-Parthenon chief economist Gregory Daco. He added that real consumer spending growth was boosted by affluent households’ spending on services. More recent data show gloomier consumers in March, with sentiment dipping to its lowest reading of the year according to a University of Michigan survey.
“Interviews completed prior to the military action in Iran showed an improvement in sentiment from last month, but lower readings seen during the nine days thereafter completely erased those initial gains,” said survey director Joanne Hsu. “Gasoline prices have exerted the most immediate impact felt by consumers,” she added. For all of 2025, GDP growth was 2.1 percent, slightly below the 2.2 percent previously estimated.
While Trump has repeatedly called for lower interest rates to boost the economy, the Fed’s job is complicated by persistent inflation and now, further price pressures as energy costs spike. The independent central bank, which has a dual mandate of maintaining stable prices and low unemployment, would typically be inclined to cut rates to support employment. The US economy shed 92,000 jobs in February while unemployment crept up.
But the Fed also uses higher interest rates to rein in inflation, meaning policymakers are in a tough spot. Even if the pre-war economy was in decent shape, “if energy prices remain close to current levels, it will more than offset the boost from fiscal stimulus we had anticipated,” warned Michael Pearce of Oxford Economics. That could prompt a downward revision to forecasts for consumer spending — a key growth driver — in the first half of 2026, he said.
© 2024 AFP
